Focus on Ag: Crop farm profitability will vary for 2021
Ask a farmer what their profit levels from crop farming were in 2021, and the answers can range from “one of the best ever” to “pretty good” to “acceptable” to “downright terrible.”
Any of those answers could be correct, depending on where the farmer is located and how the 2021 drought affected crop production in the area. The other big factor in farm profitability in 2021 was where farmers were positioned in the volatile grain markets during the year. There will also be some variation in crop insurance coverage and level of government farm program payments that could potentially affected farm profitability.
A brief overview of how some of these major factors will likely affect final farm profitability in 2021 follows.
2021 crop yields
Mother Nature was not kind to many producers in North and South Dakota, as well as in portions of western Minnesota and in some other areas of the Upper Midwest, as they experienced the worst drought since 2012. In some cases, it was the worst drought since 1988.
The drought in these areas resulted in corn and soybean yields that were 20% to 30% percent or more below actual production history yields. The drought also resulted in very low hay and pasture production, which led to many cow/calf producers in the region to liquidate a portion of their beef herd.
Late in the growing season, large areas in southwestern and west-central Minnesota were also affected by strong windstorms that severely damaged crops, resulting in greatly reduced corn yields in some locations.
Many crop farmers in southern Minnesota and northern Iowa would categorize 2021 crop yields as “better than expected.” Following very favorable planting and early season growing conditions for both corn and soybeans, weather conditions turned very hot and dry from late May through June. In many areas, it remained quite dry until mid-August, with the exception of a few timely rains in July. Many portions of this region only received 50% to 75% of the normal growing season precipitation from May 1 through Sept. 30, and much of that came after mid-August. However, the combination of excellent planting conditions, no drown-out loss, timely rainfall and above normal growing degree units resulted in average to above average corn and soybean yields for the year in many portions of the region.
Given the very dry conditions in many areas for most of the growing season, 2021 was also a very good testament for the advancements in crop seed genetics that has occurred in the past couple of decades.
On the other hand, many growers in Illinois, Indiana and the eastern Corn Belt, along with portions of eastern Iowa, southeastern Minnesota and southern Wisconsin had some of their best crop yields ever in 2021. These areas benefitted from all of the factors described earlier as far as early planting, no crop loss from heavy rains and above normal growing degree units, as well as also receiving much more uniform rainfall during the growing season than in the areas that were described earlier. The combination of excellent corn and soybean yields, together with very strong crop prices, led to some of the best profit margins ever for some crop producers in these regions.
Grain marketing decisions
As in most years, where farmers were positioned in the grain market and the grain marketing decisions that were made by farm operators will have a big impact on the profit levels for their crop enterprise in 2021.
Both corn and soybean markets have been fairly strong throughout most of 2021 due to increased demand both for domestic uses and for export markets. China returned to buying U.S. soybeans in a big way late in 2020, which has been a trend that has continued throughout 2021. China also became a major importer of U.S. corn, as the country increased its feed capacity for rebuilding its swine herd following the devastation that resulted from African swine fever. The “basis” level between Chicago Board of Trade prices and local corn and soybean prices has remained extremely tight in many areas of the Upper Midwest, which has also enhanced grain marketing opportunities.
The local “new crop” corn price early in the year was $4 to $4.50 per bushel at many locations in the Upper Midwest. Many farmers took advantage of that price to forward contract some of their corn for post-harvest delivery in 2021 or early 2022, since this was the best pre-planting corn pricing opportunity for several years. During much of the period from May until now, the local price for 2021 “new crop” corn in the Upper Midwest has been in a range of $5 to $5.50 per acre, or about $1 per bushel higher than the price earlier in the year. Many farmers are now facing this same corn pricing dilemma for next year, as forward contract prices for the 2022 corn crop are above $5 per bushel, which is at the highest level in nearly a decade. They are wondering whether to take that price from a risk management standpoint or to roll the dice on prices going even higher.
There was also a big difference in post-harvest marketing following the 2020 crop year. Many farmers had sold all or most of their 2020 corn and soybeans following harvest due to the best crop price levels that we had seen in many years. Once the soybean price exceeded $10 per bushel and the corn price exceeded $4 per bushel late in 2020 and early in 2021, crop producers began aggressively selling their 2020 corn and soybeans at these profitable levels. However, from late April through July of 2021, the cash prices were $14 to $16 per bushel for soybeans and $6 to $7 per bushel for corn across the Upper Midwest. By that time, many farmers had very little 2020 grain remaining to be sold.
The timing of crop sales can have a major impact on final profit levels for crop producers. If two farmers both had a final 2020 corn yield of 200 bushels per acre, the farmer who sold his corn for $4.50 per bushel grossed $900 per acre, while the farmer that had an average price of $6 per bushel grossed $1,200 per acre, which is a difference of $300 per acre. Both farmers probably netted a profit on the 2020 corn crop; however, there is a big difference in the level of profitability. We are likely to see this wide variation in crop production profit levels again 2021 due to both yield differences and grain marketing strategies.
2021 crop insurance coverage
The level and type of crop insurance coverage that a producer carried for the 2021 crop year will also affect farm profitability in the areas that had greatly reduced crop yields for the year.
Corn and soybean producers had the option of selecting revenue protection crop insurance policies ranging from 60% to 85% coverage levels. The level of insurance coverage can result in some producers receiving crop insurance indemnity payments, while other producers receive no indemnity payments, even though both producers had the same actual production history yield and the same final yield. A majority of Midwestern corn and soybean producers likely have “enterprise units” for their 2021 crop insurance coverage, in order to reduce premium costs. This combines 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 2021.
Some farm operators also carry special wind insurance coverage, which may have been beneficial in various locations in 2021.
Corn and soybean producers with average or above average yields will likely have a very good to excellent farm profit year in 2021, depending on their grain marketing decisions. Producers with below average to very low crop yields in 2021 will likely have reduced profit levels to disastrous profit levels for the year, depending on their crop insurance coverage and grain marketing decisions.
There are also some U.S. Department of Agriculture emergency disaster programs available to crop and livestock producers that were severely impacted by the 2021 drought which can be accessed through local Farm Service Agency offices. Farm operators who are facing serious year-end cashflow shortages are encouraged to consult their farm management advisors and ag lenders sooner rather than later to look at ways to address the situation.
For additional information contact Kent Thiesse, farm management analyst and senior vice president, MinnStar Bank, Lake Crystal, Minn., at 507-381-7960 or email@example.com.