Ask a farmer what their profit levels from crop farming were in 2018, and the answers can range from “pretty good” to “acceptable” to “right down terrible.” Farm profitability has been battered this year, depending on location, by erratic weather conditions that have hampered crop production. Income per acre varied significantly depending farm operators’ marketing decisions and crop insurance. Here is a brief overview of the ways these factors are in play in 2018:
Crop yields in 2018: Mother nature was not kind to many producers in southern Minnesota and northern Iowa in 2018, as well as in some other areas of the Upper Midwest. Several areas received 50-100 percent more rain than the average growing season. These same areas also experienced severe storms late in growing season which significantly reduced crop yields for the year. Some growers in south-central and southwest Minnesota, along with the adjoining regions of northern Iowa, are reporting their lowest corn yield since the disaster year of 1993. Overall, corn yields in the region were 10-20 percent below long-term averages, and probably 15-30 percent lower than 2015-2017 average. In general, soybean yields were 5-20 percent below the long-term average.
By comparison, growers in Illinois, Indiana, and the eastern Corn Belt are having record crop yields in 2018. Portions of southeast, central, and northwest Minnesota, as well as east and central Iowa, reported above-average yields, as did parts of Nebraska and the Dakotas. At a farm-level price of $3.25 per bushel, a farm operator with a yield of 220 bushels per acre will gross $715 per acre, while a producer with 180 bushels per acre grosses $585 per acre, and a producer with 140 bushels per acre only grosses $455 per acre.
The “market facilitation program” (MFP) payments, which are being paid to farm operators to offset market price reductions resulting from tariffs and trade issues, are based on final 2018 crop yields. The most substantial estimated MFP payment level is $1.65 per bushel for soybeans. So, a producer in the eastern Corn Belt that had a soybean yield of 70 bushels per acre will get an estimated MFP payment of $115.50 per acre, while a producer in southern Minnesota that had a weather-reduced yield of 40 bushels per acre will receive only $66 per acre.
Grain marketing decisions: As in most years, farmers’ grain marketing decisions will have a significant impact on profit levels in 2018. The biggest difference will likely come in soybeans, where producers in many areas had the opportunity to “lock-in” cash prices above $9.50 per bushel on a portion of their anticipated 2018 production from February to May this year, before the Chinese tariffs on U.S. soybeans. Current soybean cash price levels are near $8.25 per bushel in southern Minnesota, and even lower in some areas.
To illustrate the impact of locked-in pricing, consider two farmers – A and B – who both targeted a yield of 60 bushels per acre for soybeans at the beginning of 2018. Due to the weather conditions, they both only generated a yield of 50 bushels per acre. Farmer A “locked-in” two-thirds of the anticipated production (40 bu./acre) at $9.75 per bushel and sold the balance at $8.25 per bushel. Farmer B sold the entire production at harvest for $8.25 per bushel. Farmer A would have a gross income of $472.50 per acre, while farmer B would have a gross income of only $412.50 per acre, a difference of $60 per acre.
While the timing of marketing decisions impacted profits less for corn, it still played a role in income per acre. For example, there were several opportunities from March to May to “lock-in” a local cash corn price of $3.50-$3.65 per bushel in southern Minnesota, which compares to the current cash price near $3.25 per bushel. Farmers who locked-in created a difference of $30-$60 in gross income per acre.
Don’t overlook grain marketing decisions as a major factor in farm profitability.
2018 crop insurance coverage: The level and type of crop insurance coverage that a producer carried for the 2018 crop year will also impact farm profitability in the areas where crop yields suffered.
Corn and soybean producers had the option of selecting revenue protection (RP) crop insurance policies ranging from 60 percent to 85 percent coverage levels. The level of insurance coverage can result in some producers receiving crop insurance indemnity payments, while other producers receive none, even though both had the same adjusted APH yield and the same final yield. For example, at an adjusted APH corn yield of 190 bushels per acre and a final 2018 corn yield of 155 bushels per acre, a producer with 85 percent RP coverage would receive a gross indemnity payment of $69.14 per acre, while a producer with 75 percent coverage would receive no indemnity payment.
The majority of Midwest corn and soybean producers chose “enterprise units” for their 2018 crop insurance coverage to reduce premium costs. In doing so, they combined all acres of a crop in a given county into one crop insurance unit. By comparison, “optional units” allow producers to insure crops separately in each township section, which can be a big advantage in a year such as 2018. For example, assume that producers A and B both have five separate farms in the same county with an APH corn yield of 190 bushels per acre, and with an overall average 2018 corn yield of 165 bushels per acre. However, three of the farms average 175 bushels per acre and two of the farms average 145 bushels per acre. Producer A has an 80 percent RP policy with optional units and producer B has an 80 percent RP policy with enterprise units. Producer A would receive no insurance indemnity payment on three farms; however, would receive a gross insurance payment of $68.32 per acre on two farms. Producer B would receive almost no insurance payments on any farms.
Corn and soybean producers in Illinois, Indiana, and other areas with average or above average yields will likely have an average to very good profit year in 2018, depending on their grain marketing decisions. Farm operators that had average to slightly below average yields for the year will probably have acceptable to reduced profit levels in 2018, depending on grain marketing decisions. Finally, producers with below average to very low crop yields in 2018 likely will have disastrous profit levels for the year, depending on their crop insurance coverage and their grain marketing decisions.
Farm operators that are facing serious cash flow shortages for the 2018 crop year are encouraged to consult their farm management advisers and ag lenders sooner than later to look at ways to address the situation. Farm operators should also consult their tax advisers before the end of the year, as there are changes in the new tax law relative to the tax treatment of farm income losses for a year.
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