August 7, 2023
SOME FARMERS COULD FACE PROFIT CHALLENGES BY YEAR-END
It has become somewhat easy to overlook farm profitability concerns for crop production in the Upper Midwest following three years in a row of strong profit levels (2020-2022); however, there are signs that point to more challenging farm profit scenarios in the future. Earlier this year, the University of Minnesota recently reported that the median net farm income for Southern Minnesota farmers in 2022 was $177,614, which was among the highest on record. This followed median average farm income levels of $176,426 in 2021 and $102,248 in 2020. The very positive net farm income levels from 2020-2022 followed seven years (2013-2019) in a row of sup-par net farm income levels in the region. The recent strong net farm income levels were enhanced by robust crop profits that resulted from average to above average crop yields and the highest grain market prices since 2012.
As we enter the final half of 2023, there are signs that average farm profit levels for 2023 will likely decline and even become negative for some farm operators. Almost every crop input expense is higher in 2023 compared to expense levels in 2022 and other recent years. Much of the focus was on higher fertilizer costs for corn; however, input costs have also increased for seed, crop chemicals, diesel fuel, repairs, custom work, and labor. Interest expense, machinery depreciation and other overhead costs have also increased in 2023 compared to recent years. In most areas, land rental costs are also 10-25 percent higher than a couple of years ago. Now producers are facing the prospects of much lower commodity prices and potentially reduced crop yields due to drought in some areas.
Many types of fertilizer products reached record price levels in 2022 and did not decline significantly until after January 1, 2023. As a result, most crop producers had already locked-in their fertilizer costs for 2023 prior to the price decline, which is likely to have a big impact on corn breakeven levels for 2023. Fertilizer expense had typically accounted for about one-third of a corn farmers crop input costs (2013-2021); however, in 2022 and 2023 the fertilizer cost has risen to nearly 40 percent of total input costs for typical crop operations in Southern Minnesota. The good news is that the decline in fertilizer prices this year should help lower fertilizer expenses for 2024 and bring the ratio closer to long-term averages again.
Swine and dairy producers have already felt the financial pinch in 2023. Many hog producers have been losing $20 to $40 per head on every pig marketed during the first half of 2023. Obviously, some farmers can only withstand those types of losses for a given time before they need to make some decisions regarding their future in hog production. In recent months, the liquidation of mother sows has increased significantly due to the low profit margins. In the short-term that has sent even more hogs to market and added to the already over-supply of pork in the U.S., putting even more downward pressure on already depressed market hog prices. Milk prices at the farm-level in recent months have been $12 to $14 per cwt., when most family dairy farm operations need $18 to $20 per cwt. or more to breakeven. At the farm level, the negative profit margins for livestock producers have been driven by low market prices, high input costs for feed, supplies, and labor, rapidly rising interest rates.
An analysis of actual data from the SCC Farm Business Management program and the University of Minnesota FINBIN program on cash rented corn acres in Southern and Western Minnesota (2013-2022) shows some interesting trends on profitability levels for corn production in recent years. The analysis takes the average corn direct input costs, cash rent costs, and overhead expenses and divides those expenses by the average corn selling price for the year to arrive at how many bushels of corn it took to cover the various expenses, as well as the bushels need to cover all expenses. The net return over all costs would be the farm operator’s “net return to labor and management”. The analysis did not include crop insurance or government farm program payment income into the “bushels needed” calculations; however, that data is included in the “net return over all costs” figure. (NOTE — Please refer to the attached Table from complete data from 2013-2022, with estimates for 2023.) Based on the FBM data, there was a negative “net return” over all expenses each year from 2013-2018, with less bushels produced than were needed to cover all crop expenses in some years. From 2020 to 2022, corn producers in Southern Minnesota have benefitted from favorable corn yields and strong commodity prices, together with manageable expenses, to achieve some very solid profit levels. An analysis of estimates for the 2023 crop year shows that there will likely be higher input costs, increased land rental rates and higher overhead expenses. Based on an average corn price of $5.50 per bushel for the 2023 crop, it will take an estimated corn production level of 199 bushels per acre to cover all expenses, which increases to 231 bushels per acre at a corn price of $4.75 per bushel. By comparison, it took only 154 bushels of corn in 2022 and 149 bushels in 2021 to cover all expenses.
Obviously, there is a wide variation in breakeven costs among farm operators in a given year, depending on final average yield and the market price received, as well as the variation in crop input costs and land expense. Based on the Southern Minnesota FBM data for 2022, the average net return for corn production on cash rented farmland ranged from +$66.46 per acre on the 20 percent low profit farms to +$581.77 per acre on the 20 percent high profit farms, compared to an overall average return of +$314.14 per acre on 925 farms. The lower profit farms did have lower average corn yield levels in 2022, which could have been weather related; however, these farms also had $66 per acre in higher crop input and land rent expenses, compared to the average farm.
The combination of significantly higher crop input costs and land rental rates is likely to put more pressure on crop breakeven prices for 2023. Using typical crop input expenses and average overhead expenses, together with a land rental rate of $275 per acre and a targeted return to the farm operator of $50 per acre, the breakeven price to cover those expenses for corn in 2023 for most producers will likely be approximately $5.25-$5.75 per bushel at average yield levels. If the cash rental rate increases to $325 per acre, the breakeven price is likely to jump to nearly $6.00 per bushel. The estimated 2023 breakeven soybean price for most producers to cover the cost of production in will likely be in the $12.00 to $13.00 per bushel range at average yield levels.
Based on the monthly World Supply and Demand (WASDE) Report in July, USDA is estimating the U.S. average corn price for the 2023-24 marketing year (2023 crop) at $4.80 per bushel and the average 2023-24 soybean price at $12.40 per bushel. Local crop price bids in South Central Minnesota in early August of 2023 for Fall delivery at local ethanol and processing plants were near $4.50-$4.80 per bushel for corn and $12.50 to $12.80 per bushel for soybeans, with slightly higher bids at soybean processing plants.
Many farm operators have remained quite optimistic about crop prices going into 2023 and have not “locked-in“ a market price on a significant amount of their anticipated 2023 corn and soybean production. The best opportunities to forward price 2023 corn and soybeans in recent months were a few brief stints above $5.00 per bushel for corn and above $13.00 per bushel for soybeans in June and July. Crop prices on the Chicago Board of Trade (CBOT) have been quite volatile in recent weeks due to concern over drought conditions in the U.S., changing weather patterns, variable crop yield projections, and changing political situations in the world.
The “basis” level, which is the difference between the local cash price being offered in a given month and the closest CBOT futures price, has been quite wide for late Fall delivery for both 2023 corn and soybeans. In recent years, the basis level following harvest has narrowed and even become positive in some instances, due to tighter than expected local corn and soybean supplies. The anticipation of this occurring again following the completion of the 2023 harvest season has resulted in some farmers “hedging” their grain. A “hedge” position allows producers to lock in a corn or soybean futures price on the CBOT, while but leaving the final local market price open to take advantage of any improvement in the basis level in the months following harvest.
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Note — For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President,
MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960)
E-mail — kent.thiesse@minnstarbank.com) Web Site — http://www.minnstarbank.com/