Focus on Ag: Farm profitability highlights top ag topics for 2021

Kent Thiesse
Farm Management Analyst and Vice President
Kent Thiesse

At the end of every year, various publications, websites, etc. have their Top 10 or Top Five lists for that year. In this issue of Focus on Ag, I am highlighting my Top Five Ag Topics for 2021, based on issues that were discussed in the columns throughout the year.

My rankings follow.

1. Strongest U.S. net farm income levels since 2013

Based on the data in the latest 2021 Farm Income Forecast that was released by the U.S, Department of Agriculture Economic Research Service in early December, U.S. net farm income is expected to increase by $18.4 billion or 18.7% above 2020 levels. The estimated 2021 net farm income is now estimated at $116.8 billion, which would be the highest inflation-adjusted net farm income since the adjusted net farm income level  of $123.8 billion in 2013.

In the recent farm income report, USDA estimated the total U.S. net cash income for 2021 at $133 billion, which is an increase of $17 billion or 14.7% from a year earlier. Net cash income includes cash receipts from all farm-related income, including government payments, minus cash expenses for the year. Net farm income is accrual-based, which includes adjustments in the cash income for changes in inventories, depreciation and rental income.

The 2021 U.S. net farm income projections show some very strong improvement compared to 2020 and are considerably higher than farm income levels from 2014-2019.

The improvement in 2021 net farm income was largely due to improved commodity prices for crops and livestock, as well as better-than-expected crop yields in many areas, and continued government farm program support. By comparison, the improved U.S. farm income levels in 2020 were largely driven by the highest level of government farm program payments ever recorded, which included payments for trade-disruption and COVID-19-related payments, as well as some traditional farm program payments and disaster payments.

2. Inflation and rapidly increasing farm input costs

Almost every input cost for crop production will increase in 2022 compared to expense levels in 2021 and other recent years.

Much of the focus has been in higher fertilizer costs for corn, which are expected to nearly double in 2022 compared to average 2021 fertilizer costs. Several phosphate and potash fertilizer products have increased by 15% to 20% since late September, while the cost of anhydrous ammonia, urea and other nitrogen fertilizer products have increased by approximately 50% in the past few months.

Input costs are also expected to be significantly higher for crop chemicals, diesel fuel, propane, repairs, custom work and labor.

As of late November, diesel fuel prices were 60% higher than a year earlier, while and the cost of some commonly used herbicides were two to three times higher than 12 months ago. The cost of farm equipment has also increased substantially from a year ago, which will likely increase depreciation and other overhead costs for 2022.

The combination of significantly higher crop input costs along with increasing land rental rates will likely put more pressure on crop breakeven price levels for 2022. Using typical crop input expenses, other direct costs, average overhead expenses, together with a land rental rate of $250 per acre and a targeted return to the farm operator of $50 per acre, the breakeven price on cash-rented acres to cover direct and overhead expenses for corn in 2022 would be approximately $5 to $5.50 per bushel. If the cash rental rate increases to $300 per acre, the breakeven price jumps to about $5.50 to $6 per bushel. This compares to corn breakeven levels of $3.75 to $4 per bushel in 2021.

The breakeven soybean price to cover the cost of production and $250 per acre land rent would be about $11.50 to $12.50 per bushel, which compares to soybean breakeven levels of $9 to $9.50 per acre this year.

3. Strong grain prices throughout most of 2021

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 remained quite strong throughout most of 2021, due to increased demand both for domestic uses and for export markets, especially to China. 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 due to strong local demand and tight grain supplies, which has also enhanced grain marketing opportunities during the year.

“New crop” cash corn price bids in southern Minnesota were near $4 per bushel early in 2021, before rising to above $5 per bushel by late April and staying above that level for the remainder of the year. The cash corn price was above $5.50 per bushel in late December.

The 2021 “new crop” cash soybean bids in southern Minnesota started the year at $10.50 to $11 per bushel and rose to above $13 per bushel by May. Local harvest soybean prices were near $11.75 to $12.50 per bushel, which remains close to year-end soybean price levels.

USDA is currently estimating the average farm prices for the 2021-22 marketing year, which ends on Sept/ 30, 2022, at $5.45 per bushel for corn and $12.10 per bushel for soybeans. This is slightly higher than current forward price bids being offered in southern Minnesota.

4. Better-than-expected crop yields in many areas

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. 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. 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.

On the other hand, Mother Nature was not kind to many producers in North Dakota 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, and in some cases the worst drought since 1988. The drought in these areas resulted in corn and soybean yields that were 20% to 30% 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 being forced to liquidate a portion of their beef herd.

5. Sharp increases in land values

Iowa State University recently released the 2021 Farmland Survey results, which showed that average farmland values in Iowa increased by 29% from a year earlier, rising to an average value of $9,751 per acre in December of 2021 compared to $7,559 per acre in 2020. This is the highest nominal land value since Iowa State began surveying land values in 1941, topping the previous high average price of $8,716 per acre in 2013.

The percentage increase in annual land values was the second-highest on record, trailing only a 32.5% increase in 2013.

Recent data from the U.S. Federal Reserve showed 2021 annual land value increases of 26% in Minnesota, 23% in South Dakota and 16% in Nebraska, as well as 10% to 15% in Illinois, Indiana and Wisconsin. The 2021 increase in drought-stricken North Dakota was only 4%. The higher land values were largely driven by improved crop profitability, higher farm program payment levels, low interest rates and rapidly rising U.S. inflation trends.

For additional information contact Kent Thiesse, farm management analyst and senior vice president, MinnStar Bank, Lake Crystal, Minn., at 507-381-7960 or kent.thiesse@minnstarbank.com.