Negative margins leave farmers struggling with decisions for the future

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Farm Forum

Decisions about what to plant next year are weighing on the minds of farmers as they get ready to harvest the 2014 corn and bean crop. Prices have dipped to alarmingly low levels for corn and soybeans, and farmers are anticipating great yields. Unless there is a major event, prices are predicted to stay low for the next few years.

Basis volatility as well as just plain low cash prices has made it really hard to budget for next year, and a lot of people are wondering what the market really wants producers to plant.

Depending on yields, crop insurance may offer financial help for farmers this fall, but then the question becomes, “What should I plant next year?”

For many farmers, 2014 will be a wait and see year. Many place seed orders for the next season in the fall, and producers will be taking a close look at input and commodity prices.

“I like to keep our options open as long as possible as far as what we will be planting, so we may not really know what we will all be planting until the planter is about ready to pull in the field next spring,” Kurt Zuelke, a farmer near Britton, said. “With the forecast fertilizer, seed, and land costs, it really is hard to make corn pencil out at its current price for 2015 corn.”

Negative margins

Those who’ve put a pencil to costs versus returns are very concerned. Here’s an example from Jack Davis, SDSU Extension Crops Business Management Field Specialist, showing how plugging in this fall’s numbers result in negative numbers, depending on costs of production.

Davis used $634 as the average cost for crop inputs for corn. That would include seed, fertilizer, fuel, machinery, land rent and spraying. (This number should be adjusted with the actual costs per farm/field.) The price for corn fluctuates, but using a cash price of $2.70 for corn (Sept. 14, 2014), here’s an example of what the loss would be per acre.

At an average yield of 150 bu. per acre x $2.70, the income per acre would be $405. Subtracting input costs of $634 means a loss of $229 per acre.

When taking crop insurance into account, depending on the yield and price, farmers may get some help to make up their losses. Davis said that much of the state purchases Revenue Protection (RP) coverage.

In a recent column, Will Walter, instructor at the S.D. Center Farm/Ranch Management, explained crop insurance guarantee levels in this way:

“The spring crop insurance price was $4.62 on corn and $11.36 on soybeans. For corn, the spring price is the average of the Dec. corn futures price in the month of February. The spring price for soybeans is the average of the Nov. futures price in the month of February. For example, if I have a 125 bu./acre yield, based on my APH (Actual Production History), multiplied by a common 75% level of coverage, I’m covered for 93.75 bu./acre at $4.62 per bushel, or $433 per acre of revenue coverage. If the fall harvest price (Chicago futures) is in the $3.25 range (on Aug. 1 it was $3.61) a revenue loss will not occur until the yield drops below 133 bushels. ($433 per acre divided by $3.25 per bushel = 133.23 bu.) So in this example, a yield above your APH of 125 bu./acre could result in a revenue loss due to the lower harvest price.”

Sunflowers?

“I am starting to hear growers talk about replacing some of their corn and bean acres with sunflowers in 2015,” John Sandbakken, with the National Sunflower Association in Mandan, said. “Several growers told me that they had taken sunflowers out of their rotations a few years ago and are considering putting them back in because sunflowers pencil out better for them than corn and beans given current prices. Growers are especially interested in growing high oleic or confection sunflowers because of the price premiums they offer. I think we will start to see most 2015 new crop prices out around mid-October so that may influence decisions.”

Danny Dale at Advanced Sunflowers in Huron said that most of the 348,000 acres of sunflowers planted in the United States are grown under contract. Current prices were at 20 cents per pound for confectionary seeds, 18 cents per pound for oil seeds.

“The opportunities are there for farmers,” Dale said. “It’s a niche market. A lot of guys didn’t contract this year so they will be putting downward pressure on the sunflower market this fall.”

This year’s sunflower crop is looking pretty good. Some areas ran out of moisture, hurting other crops, according to Dale. With the deep tap root, sunflowers were able to grab what they needed. With more farmers growing sunflowers in South Dakota, trucking is a nightmare. If too many farmers start growing confection sunflowers, then it will flood the market, and that market will be in the same boat as corn.

“I’m not sure if I would say people are looking for more alternative crops, but I would say they are trying to figure out what they can grow that will make them some money,” Ruth Beck, SDSU Agronomy Field Specialist, said. “Sunflowers are one crop that still may be profitable. Farmers will continue to grow sunflowers, but the number of acres they grow is restricted by rotation (once every 4 years on a field). So my thought is that even though producers are looking for what is going to be profitable and will swing some acres to those crops. There are other factors that come into play that will restrict them to some degree: rotation, workloads, equipment, etc. The farmers in South Dakota do a good job with corn, beans, sunflowers and wheat. Most of the time we know we can produce a decent crop with these commodities. Some may switch some acres to alternative crops, but most high paying alternative crops will hold risks as well. So I do not see the acres being major.”

Beck noted that prices for oilseeds follow soybeans, so there won’t be advantages with those crops.

Prices for specialty crops such as field peas are down. In many alternative markets, if a number of farmers start to grow that crop, the market will be saturated quickly, and the price advantage disappears.

Sorghum has pushed further east into corn country, but climate is a big factor. The crop needs warm nights, Beck said. Even some of the longer day sorghum could be in trouble this year.

Pricing

Farmers are asking lots of questions, wondering what they can/should do, but for the most part it has only been just exploring their options, according to Michelle Muilenburg of Midwest Marketing in Groton.

“If they are choosing to do something ‘new,’ I have been highly encouraging them to try and find a market to price at least a portion of the production now, so they don’t get burned next fall. The pricing mechanism is hard to find in a lot of those crops a full year ahead of production. The other problem is that we have become such a corn/bean area, most of the specialty crops are going to carry additional logistic costs with them, as they are going to have to ‘go to the market’ for delivery, and most of those are not local markets anymore. They also have to consider crop insurance and government program coverage of those new/specialty crops.”

No doubt, she said, “It is going to be a very challenging year or two for these guys.”

Kim Dillavan, SDSU Extension crops business management field specialist, asked, from an economics perspective, what alternatives do farmers have?

“Most have machinery that is dedicated to row crops,” Dillavan said. “This limits what they can do without purchasing equipment and changing what they are used to. In reality, farmers have struggled through years of low commodity prices, and there are not any real good alternatives.”

“I think most producers will try to keep their options open, but I do not foresee a huge swing to small grain or specialty crops either,” Zuelke said. “I think there will still be mainly corn and soybeans planted.”