Tight profit margins likely to continue in 2019

Looking at the year ahead, tight profit margins in crop production will likely continue. Corn and soybean prices are projected to be near or below breakeven levels. With increases in seed, fertilizer and chemical costs, higher interest rates, and only average crop yields, potential profits in 2019 look grim. Required loan payments on capital investments will be another major variable.

Approximately two-thirds of corn and soybean acres in southern Minnesota are under a cash rental agreement. Average county land rental rates in 2017 ranged from $190 to $235 per acre, with an average near $220 per acre. This was a decline of about 12 percent from an average of nearly $250 per acre in both 2013 and 2014. Average rental rates for 2018 in the region were likely very similar to 2017 rental rates or slightly lower. Based on early reports, 2019 land rental rates will remain steady or adjust slightly downward.

The University of Minnesota Center for Farm Financial Management has a website called FINBIN, which offers access to average income levels, direct and overhead expenses, and net return levels on farms, based on actual farm management data submitted by producers. It can be sorted on the basis of whole farms, crop or livestock farms, location, farm size or income levels, owned versus cash rent land, and other data points. Another FINBIN tool is the benchmark report, which compares actual individual farm management data from a producer’s farm with average data from similar farm operations in the same area.

Based on FINBIN analysis for 2015-2017 for nearly 900 crop farms with cash rented corn acres in southern Minnesota, the average net return over average direct and overhead expenses was negative ($48.35) per acre per year. Further analysis showed negative averages of more than ($56) per acre net return in 2015, more than ($54) per acre in 2016, and nearly ($34) per acre in 2017. These losses were despite above average corn yields in all three of the years for much of the region.

It is likely that 2018 will again show a negative average net return on rented corn acres for most of the region. Corn yields were average or below, with some in south-central and southwest Minnesota with yields 20-30 percent or more below the previous 3-year (2015-2017) average yield of nearly 209 bushels per acre. 2018 crop insurance indemnity payments likely only accounted for a portion of that lost income. The average corn price in 2018 was probably close to the three-year average of $3.36 per bushel. This could result in a net loss of ($100-$150) per acre for some for 2018.   

Based on FINBIN data, the average direct and overhead cost per bushel of corn produced in southern Minnesota during 2015-2017 was $3.65 per bushel, with a high of $3.83 per bushel in 2015 and a low of $3.45 per bushel in 2017. Again, these figures were aided by well above average corn yields in all of the years. The average farm-level corn price during that time was $3.36 per bushel, 29 cents below the average breakeven level.

Assuming similar average production expenses ($424/acre), land rental rates ($219/acre), and overhead costs ($99/acre) for corn production in 2018 (totaling $742 per acre) as in 2017, the breakeven corn price would be $3.71 per bushel with a yield of 200 bushels per acre. That increases to $4.12 per bushel at 180 bushels per acre, and $4.64 per bushel at a yield of 160 bushels per acre, excluding crop insurance payments. These breakeven levels do not include any return to the farm operator for labor and management. The cash corn price for the 2018 crop at most locations in southern Minnesota has been $3.25-$3.50 per bushel in recent weeks. Prospects for any farm program payments for the 2018 corn crop are quite low in most counties.   

Based on FINBIN analysis for 2015-2017 for over 800 crop farms with cash-rented soybean acres in southern Minnesota, the average net return over average direct and overhead expenses, including land rent, was calculated at $33.60 per acre per year. The positive profit margins for soybeans in the region were achieved on a 3-year average yield of more than 59 bushels per acre. It is likely 2018 soybean yields in most of the region will be down 10 to 20 percent. The average farm-level soybean price will likely be closer to $8.00 per bushel, compared to the three-year average of $9.08 per bushel. The soybean market facilitation program payments of $1.65 per bushel will certainly compensate for a significant portion of the lost income from soybean production in 2018.

The big concern for soybeans is profitability for 2019 and beyond at current market price levels. If we assume average production expenses ($220/acre), land rental rates ($220/acre), and overhead costs ($70/acre) in 2019 (totalling $510 per acre), the breakeven soybean price would be $8.50 per bushel with a yield of 60 bushels per acre. The breakeven level would increase to $9.27 per bushel at 55 bushels per acre, and $10.20 per bushel at a yield of 50 bushels per acre. These breakeven levels also do not include any return to the farm operator for labor and management for 2019. The current forward cash price being offered for the 2018 soybean crop at most locations in southern Minnesota has been $8.00-$8.50 per bushel in recent weeks.

As we plan ahead for another year of tight margins in corn and soybean production, it is a good time for farm operators to review all aspects of their crop operation. Looking for ways to reduce or control direct and overhead expenses, including land rental costs, is another key to improving profit potential. Decisions that are made on crop marketing and crop insurance, as well as potential decisions or future government farm programs, can also have a significant impact on potential profitability for 2019.

For additional information email Kent Thiesse, Farm Management Analyst and Senior Vice President, MinnStar Bank, Lake Crystal.  
 
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