FOCUS ON AG

May 24, 2021

FARMER OPTOMISM AT A HIGH LEVEL

Recent surveys have shown that optimism among farmers for both the current ag economy and the future outlook for farm profitability are quite favorable. This optimism is not surprising, given the much higher levels of net farm income in 2020, the current strength in most of the commodity markets, and the prospects for a profitable year in 2021 in most ag sectors. The 2020 net farm income levels in that region were enhanced by robust crop profits that resulted from above average crop yields, improved grain market prices, and significant levels of government program payments. Livestock profit margins were also improved compared to recent years; however, at much more modest levels than crop profits.

Purdue University does a monthly survey called the “Purdue/CME Ag Economy Ag Barometer” to gauge farmer optimism regarding the current state of the ag industry and future expectations regarding the farm economy. In recent years, there have been some wide swings in the monthly Ag Barometer data, primarily due to the trade war with China in 2018 and 2019, the Covid pandemic in 2020, and now the rapid rise in commodity prices in late 2020 and 2021.

The most recent Ag Barometer reading in late April had an average reading of 178, which is just 5 points below the all-time high reading in October of 2020. A year ago, during the early stages of the Covid pandemic, the average April reading was at only 96 points, which was near the lowest ever recorded. The recent Ag Barometer listed a score of 195 for current conditions in the overall ag economy, as compared to 169 for future expectations for the economy. Some farmers expressed concern over rising input costs and potential future tax policies being considered by Congress and the Biden Administration.

By nature, farmers tend to be more optimistic about the future than most other occupations. Most farmers invest several hundred dollars per acre into crop input costs for seed, fertilizer, chemicals and fuel each year, as well as added overhead expenses for land costs, farm machinery, labor, etc. Much of this investment is made before they ever plant a crop in a given year. So outside of some crop insurance coverage, the farmer is carrying most of the weather risk, marketing risk, and financial risk for that crop.

In 2021, a typical farmer on cash rented land probably has about $600 to $650 per acre in land costs and direct expenses for seed, fertilizer, chemicals, fuel, repairs, interest, etc. invested in the corn crop and about $400 to $450 per acre invested in the soybean crop. In addition, a typical farmer likely has another $75 to $100 per acre in machinery and facility depreciation costs, labor expense, insurance and other overhead expenses. Most farmers also target a minimum of $50 per acre return to labor and management on cash rented acres, which would bring the total crop investment to $750-$800 per acre for corn and $550 to $500 per acre for soybeans. So, a farmer with 1,000 acres of corn and soybeans that is under cash rental contracts that is planted half to corn and half to soybeans will likely have a total investment into the 2021 crop of $650,000 to $700,000.

Based on the previous example for expenses, using typical corn and soybean yield targets, the 2021 breakeven price to cover direct and overhead expenses in 2021 would be about $3.75 to $4.00 per bushel for corn and $8.75 to $9.00 per bushel for soybeans. If you include a $50.00 labor and management return, the breakeven prices in 2021 rise to near $4.35 per bushel for corn and $9.75 per bushel for soybeans. If 2021 crop yields are higher than typical yields, the breakeven price to cover crop inputs will be reduced; however, if yields are lower than expectations, the breakeven costs will increase. For example, a 10 percent decline in the 2021 corn and soybean yield, which is typically not covered by crop insurance, would increase the breakeven prices to around $4.75 per bushel for corn and $10.75 per bushel for soybeans.

The 2021 new crop price for harvest delivery at local elevators and processing plants is currently near $5.00 per bushel for corn at most locations across Southern Minnesota. The new crop corn prices were below $4.00 per bushel at the start of 2021, gradually rising to over $5.50 per bushel by early May, before declining slightly to current levels. New crop soybean prices for Fall delivery in 2021 are currently near $13.00 per bushel at local elevators in Southern Minnesota, with slightly higher new crop bids at soybean processing plants in the region. The 2021 new crop soybean prices started the year below $11.00 per bushel, rising to near $13.50 per bushel by early May, before declining somewhat to current levels.

Local new crop corn and soybean bids for the Fall of 2021 in other regions may be higher or lower than the Southern Minnesota grain bids, depending on the basis level in a given area. The basis level is the difference between the local bid prices and the December corn futures price and November soybean futures price on the Chicago Board of Trade (CBOT). Basis levels for both the corn and soybean local cash prices and new crop bids have been highly variable in recent months across the Midwest, depending on local grain demand.

Local cash corn bids in Southern Minnesota have ranged from $6.50 to over $7.00 per bushel since mid-April, with local soybean price bids over $15.00 per bushel. As prices rose above breakeven levels last Fall, most farmers began selling their 2020 crop. A large majority of the corn was sold from $3.50 to $5.00 per bushel and most soybeans from $8.50 to $10.50 per bushel, well below current levels. A very small percentage of the 2020 crop has been sold at the current high price levels in April and May, as many farmers had already sold their grain.

Many farmers have been struggling with making grain marketing decisions for the 2021 crop. On one hand, the current new crop price bids are above breakeven levels for both corn and soybeans; however, farmers don’t want to miss a potential run-up in prices, such as occurred with the 2020 crop. A lot of farmers are taking a mixed approach to marketing the 2021 crop, locking in a portion of the crop as a risk management tool, but keeping the marketing opportunities open on the remaining bushels.

Looking ahead to the 2022 crop year, one of the big concerns is the likely higher crop input expenses and land costs for next year. The price of most forms of nitrogen fertilizer have risen by 50 to 70 percent since the beginning of 2021. The cost of most forms of phosphorus and potassium have risen by 25 to 35 percent since the beginning of the year. The cost of fertilizer inputs for corn production in 2022 are likely to be 50 percent or more higher than 2021 fertilizer costs.

Crop input costs are also expected to higher for seed, chemicals, fuel and repairs in 2022, as compared to expense levels in 2021. Land rental rates for 2022 are also likely to increase substantially in many areas, as most land rental rates in a given year are based on farm profit levels from the preceding year. Most 2021 land rental rates were set in the Fall of 2020, prior to the current rise in commodity prices. Approximately two-thirds of the crop land in many areas of the Corn Belt is under some type of cash rental agreement. Land values have also increased substantially in recent months in many areas, which tends to raise property taxes on all owned land.

It is quite likely that breakeven costs on cash rented land for the 2022 crop year will be near $5.00 per bushel for corn and near $11.00 per bushel for soybeans. Based on the most recent USDA report on May 12, the national average prices for the 2021-22 marketing year are estimated at $5.70 per bushel for corn and $13.85 per bushel for soybeans. The 2021-22 marketing year runs from September 1, 2021 through August 31, 2022. The 2021-22 USDA price projections based on continued strong export markets and fairly tight supplies for both crops. If the export markets to China soften in the next twelve months, or if the U.S. corn and soybean production in 2021 exceeds projections, it will likely put considerable downward pressure on the USDA price estimates.

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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/