“Fine-Tuning” Profit Margins for 2016

As we end 2015, and look ahead to 2016, it appears that we will have even tighter profit margins in crop production for next year, as compared to recent years. The combination of lower projected market prices for corn and soybeans in 2016, together with nearly steady input costs for seed, fertilizer, and chemicals, will limit estimated potential returns over direct expenses and land costs, at average crop yields. Another major variable in breakeven levels in crop production are loan payments on capital investments such as farm machinery, facilities, and land purchases.

Approximately two-thirds of the corn and soybean acres in Southern Minnesota are under some type of cash rental agreement. Based on farm business management records for southern third of Minnesota, the average land rental rate in 2014 was just over $250.00 per acre; however, there was a wide range in land rental rates across the region. Most likely, average cash rental rates for 2015 in many areas of the region were nearly the same as 2014, with some rental rates declining slightly as compared to a year earlier. Based on early reports from farm operators, it appears that land rental rates for 2016 in some locations across the region may adjust slightly downward, in response to the tighter profit margins that are likely for 2016; however, many rental rates are likely to remain quite high.

The University of Minnesota Center for Farm Financial Management (CFFM) has website called FINBIN, which allows farm operators, ag lenders, farm management advisors, and others to look at average income levels, direct and overhead expenses, and net return levels on farms. The data in FINBIN is based on actual farm management data submitted by producers through the various farm business management programs. The data can be sorted on the basis of whole farms, crop or livestock farms, location, farm size or income levels, owned versus cash rent land, as well as other data sorts. Another FINBIN tool is called a “Benchmark Report”, which allows for the comparison of actual individual farm management data from a producer’s farm, compared to average data from similar farm operations in the same geographical area. All FINBIN data and farm management tools can be accessed on their website.

Based on a FINBIN analysis for the years 2012-2014 of over 800 crop farms on cash rented corn acres in Southwest, South Central, and Southeast Minnesota, the average net return over average direct and overhead expenses, including land rent, was nearly $210 per acre per year. However, further analysis showed that there was an average of a +$348 per acre net return in 2012, a negative ($7) per acre net return in 2013, and a negative ($44) per acre net return in 2014. It is likely that 2015 will again show a negative average net return, even with the above average crop yields.

There is a wide variation in the net returns on cash rented corn acres between the top 20 percent of producers, compared to the bottom 20 percent. Based on the FINBIN data in Southern Minnesota, the top 20 percent profit farms had an average net return above direct and overhead expenses in 2014 of +$143 per acre per year, compared to an average negative ($237) net return for the low 20 percent profit farms, which is a difference of approximately $380 per acre. More detailed analysis of the FINBIN data for 2014 looked at the various factors that comprise the large difference in the average net returns between the 20 percent high profit farms and the 20 percent low profit farms. The average corn yield for 2014 was 170 bushels per acre on high profit farms, and was near 158 bushels per acre on the low profit farms. The average corn market price received for 2014 was $4.19 per bushel on the high profit farms, and $3.77 per bushel on the low profit farms. The average on all farms in 2014 was a corn yield of 167 bushels per acre and a corn price of $3.97 per bushel.
There was also a significant variation in average costs per acre in 2014 between the top 20 percent profit cash rental corn farms and the low 20 percent profit farms. The average corn production expenses on all farms in 2014 were approximately $497 per acre for direct crop expenses, including seed, fertilizer, chemicals, etc., $251 per acre for land rent, and $859 per acre for total direct and overhead expenses. The top 20 percent profit farms had average expenses of around $457 per acre for direct expenses, $229 per acre for land rent, and just under $774 per acre for total expenses. The low 20 percent profit farms averaged $530 per acre in direct expenses, nearly $277 per acre in land rent, and $954 per acre in total expenses.

The average direct and overhead cost per bushel of corn produced for 2014 was $5.15 per bushel on all farms, which compares to $4.56 per bushel on the high profit farms, and $6.02 per bushel on the low profit farms. If we assume similar production expenses, land rental rates, and overhead costs for 2015 (approximately $855 per acre), with 2015 average corn yields that were approximately 10-20 percent higher than 2014 yields, the average direct and overhead cost per bushel for 2015 would be range from $4.17 to $4.55 per bushel. The current corn price for the 2015 corn crop at most locations in Southern Minnesota is below $3.50 per bushel.

As we plan ahead for very tight margins in corn and soybean production for 2016, it is a good time for farm operators to review all aspects of a crop operation. Obviously weather conditions can account for a large portion of the crop yield variation; however, there are other more controllable crop management factors that may also contribute to yield differences. Looking for ways to reduce or control direct and overhead expenses, including land rental costs, is also a key to improving profit potential for crop producers. Decisions that are made on crop marketing and crop insurance, as well as potential payments from the government farm program, can also have a significant impact on potential profitability for 2016.

Note — For additional information contact Kent Thiesse, Farm Management Analyst and Vice President, MinnStar Bank, Lake Crystal, Minnesota. Phone: (507) 381-7960); Email: kent.thiesse@minnstarbank.com; Web Site: www.minnstarbank.com


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