January 14, 2019

TIGHT PROFIT MARGINS LIKELY TO CONTINUE IN 2019

As we look ahead to 2019, it appears that the tight profit margins that have existed in crop production in the past four years are likely to continue into 2019. The combination of continued projected market prices for corn and soybeans that are near or below breakeven levels, together with increases in input costs for seed, fertilizer, and chemicals, as well as higher interest rates, will likely limit potential profit opportunities in 2019 with average crop yields. Another major variable for breakeven levels in crop production will be required 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 the southern third of Minnesota, the average county land rental rates in 2017 ranged from about $190.00 to $235 per acre; with an overall average near $220 per acre. This was a decline about 12 percent from an average cash rental rate of near $250.00 per acre in both 2013 and 2014 in the same region. Most likely, average rental rates for 2018 in many areas of the region were very similar to the 2017 rental rates, or slightly lower. Based on early reports from farm operators, it appears that land rental rates for 2019 in most locations in the Upper Midwest will again remain steady or adjust slightly downward. Some rental rates continue to remain quite high, relative to the profit potential for the coming year.

The University of Minnesota Center for Farm Financial Management (CFFM) has a 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 at the following web site: www.finbin.umn.edu

Based on a FINBIN analysis for the years 2015-2017 for nearly 900 crop farms with 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 calculated at a negative ($48.35) per acre per year. Further analysis showed that there were negative averages of over ($56) per acre net return in 2015, over ($54) per acre net return in 2016, and nearly ($34) per acre in 2017. The negative profit margins for corn on cash rented land existed in those three years, even though much of the region had above average corn yields in all three of the years.

It is likely that 2018 will again show a negative average net return on rented corn acres for a large majority of producers in the same region. 2018 corn yields were average or below for most producers, with farm operators in portions of South Central and Southwest Minnesota having 2018 average corn yields that were 20-30 percent or more below the previous 3-year (2015-2017) average yield for the region of nearly 209 bushels per acre. 2018 crop insurance indemnity payments likely only accounted for a portion of that lost income, depending on the level and type of crop insurance coverage. The average corn price received in 2018 was probably quite close to the three-year average of $3.36 per bushel. This could result in some farm operators showing a net loss of ($100-$150) per acre for 2018.

Based on the FINBIN data, the average direct and overhead cost per bushel of corn produced in Southern Minnesota over the three-year period (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. It is important to remember that these figures were aided by corn yields that were well above average in all of the years. The average farm-level corn price received during those same three years was $3.36 per bushel, which is $.29 below the breakeven level for an average farm operation.

If we assume similar average production expenses ($424/acre), land rental rates ($219/acre), and overhead costs ($99/acre) for corn production in 2018 (approximately $742 per acre) that existed in 2017, the breakeven corn price would be $3.71 per bushel with a yield of 200 bushels per acre. The breakeven level 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 any 2018 crop insurance payments. These breakeven levels dos not include any return to the farm operator for labor and management for 2018. The cash corn price for the 2018 crop at most locations in Southern Minnesota has been from $3.25-$3.50 per bushel in recent weeks, with highly variable levels. Prospects for any farm program payments for the 2018 corn crop are quite low in most counties.

Based on a FINBIN analysis for the years 2015-2017 for over 800 crop farms with cash rented soybean acres in Southwest, South Central, and Southeast Minnesota, the average net return over average direct and overhead expenses, including land rent, was calculated at a positive +$33.60 per acre per year. The positive profit margins for soybeans in the region were achieved on a 3-year average yield over 59 bushels per acre. It is likely that 2018 soybean yields in many portions of the region will be down 10 to 20 percent from the three-year average. The average farm-level soybean price received by farm operators will likely be closer to $8.00 per bushel, as compared to the three-year average of $9.08 per bushel. The soybean market facilitation program (MFP) payments of $1.65 per bushel will certainly compensate for 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 2019 average production expenses ($220/acre), land rental rates ($220/acre), and overhead costs ($70/acre) in 2019 (approximately $510 per acre), the breakeven soybean price would be about $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 from $8.00-$8.50 per bushel in recent weeks. with a lot of volatility.

As we plan ahead for another year of tight margins in corn and soybean production for 2019, it is a good time for farm operators to review all aspects of their 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 another key to improving profit potential for crop producers. 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.

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Note — For additional information contact Kent Thiesse, Farm Management Analyst and Senior

Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);

E-mail — kent.thiesse@minnstarbank.com)