Focus on Ag: Rising farm input costs likely to continue into 2023

Crop producers in most of Southern Minnesota had some very good profit years in 2020 and 2021 and will likely have another strong profit year in 2022. The higher levels of net farm income in recent years are the result of above average crop yields, strong commodity prices, and manageable crop expenses. Crop profit levels were much more variable in other areas of the Midwest that were impacted by drought conditions in 2021 and 2022. As we end the current year, it appears likely that inflation and rapidly rising crop input costs for 2023 will increase crop breakeven levels, which could potentially result in much lower profit levels for the 2023 crop year.

Almost every crop input expense for crop production is expected to increase in 2023, compared to expense levels in 2022 and other recent years. Much of the focus has been in higher fertilizer costs for corn; however, input costs are also expected to be significantly higher for seed, crop chemicals, diesel fuel, propane, repairs, custom work, labor and operating interest. About the only input not expected to a show major increase is crop insurance expense. Machinery depreciation and other overhead costs are also likely to increase in 2023.

Many types of fertilizer products have been at record price levels in the past year, which is likely to have a big impact on corn breakeven levels and could encourage more soybean acres next year. Most fertilizer products have doubled in price from 2021 costs, with some nitrogen products almost three times higher than 2021 levels. The rapid increase in fertilizer costs is being driven by high global demand, very tight supplies of many fertilizer ingredients, and by shipping issues in the United States. Fertilizer expense typically accounted for about one-third of a corn farmer's crop input costs (2013-2021); however, in 2022 the fertilizer cost will likely be 35-40 percent of total input costs, which may rise even higher in 2023.

An average corn fertilizer program in Southern Minnesota is expected to cost $300 per acre or more in 2023, without any supplemental manure applications. This compares to documented fertilizer expenses of $142 per acre in 2021 and $126 per acre in 2020, based on South Central College (SCC) Farm Business Management (FBM) data for Southern Minnesota. In addition to increases in fertilizer costs and some other crop input costs, most farmers will also likely face increases in land rental rates in 2023. Most experts expect 2023 cash rental rates in the Upper Midwest to increase by 10-15 percent or more, meaning that rental rates that were $250 to $275 per acre in 2022 will likely be $275 to over $325 per acre in 2023.

The combination of significantly higher crop input costs and increasing land rental rates is likely to put more pressure on crop breakeven prices for 2023. Using typical crop input expenses and average overhead expenses, together with a land rental rate of $275 per acre and a targeted return to the farm operator of $50 per acre, the breakeven price to cover direct and overhead expenses for corn in 2023 would be approximately $5.25-$5.50 per bushel, using a 2023 corn yield of 200 bushels per acre. If the cash rental rate increases to $325 per acre, the breakeven price jumps to about $5.50 to $6.00 per bushel. This compares to estimated breakeven levels near $4.00 per bushel in 2021 and near $5.00 per bushel in 2022. The estimated 2023 breakeven soybean price for most producers to cover the cost of production in will likely be in the $12.50 to $13.00 per bushel range at a yield of 60 bushels per acre, which be over $14.00 per bushel at a yield of 50 bushels per acre.

Based on the monthly World Supply and Demand (WASDE) Report in November, USDA is estimating the U.S. average corn price for the 2022-23 year (2022 crop) at $6.80 per bushel and the average 2022-23 soybean price at $14.00 per bushel. Local crop price bids in South Central Minnesota in late November of 2022 for the Fall of 2023 (2023 crop year) at local ethanol and processing plants were near $5.75 per bushel for corn and just over $13.00 per bushel for soybeans. Many farm operators are quite optimistic about crop prices going into 2023; however, commodity prices have been highly volatile in the past couple of years.

Recently, I prepared an analysis of the cost of production on cash rented corn acres in the Southern third of Minnesota in the past ten years (2013-2021), based on actual data from the South Central College Farm Business Management (FBM) program and the University of Minnesota FINBIN program. The analysis also included corn expense and profit estimates for the 2022 crop year and projections for the 2023 crop year. The analysis takes the average corn direct input costs, cash rent costs, and overhead expenses and divides those expenses by the average corn selling price for the year to arrive at how many bushels of corn it took or will take to cover the various expenses in a given year, as well as the bushels needed to cover all expenses.

The “net return” over all costs would be the farm operator’s “net return to labor and management” (profit level). The analysis does not include income from crop insurance or government farm program payments into the “bushels needed to cover expenses” calculations. However, the crop insurance and farm program income is included in the “net return over all costs” figure listed in the FBM and FINBIN summaries, which accounts for some of the variation in the “net return” that is listed.

Based on the analysis from the FBM data, the actual average corn yield in Southern Minnesota in every year from 2013 to 2019 was less than the bushels needed to cover all crop expenses in each of those years. There was also a negative “net return” over all expenses in each year from 2013-2018, even after crop insurance and government farm program payments were included. The data did show a positive “net return” from corn production in 2019, with the added farm profits in 2019 primarily generated by relatively high levels of crop insurance and government farm program payments. From 2020 to 2022, corn producers in Southern Minnesota have benefitted from favorable corn yields and strong commodity prices, together with manageable expenses, to achieve very high profit margins, far exceeding average profit levels of the past decade. As we look ahead to the 2023 crop year, we are anticipating much higher input costs, increased land rental rates and slightly higher overhead expenses, which will likely tighten profit margins compared to the past few years.

As we project ahead to the 2023 crop year, it appears that profit margins are going to get much tighter for corn and soybean production in the Midwest. If a farm operator has a 2023 fertilizer cost of $300 per acre with total direct input costs of $690 per acre, a cash rental rate of $300 per acre, and overhead costs of $115 per acre, the total estimated cost for corn production in 2023 would be $1,105 per acre. Based on these estimated crop expenses for 2023, it would take an estimated corn production level of 184 bushels per acre to cover all expenses at average corn price of $6.00 per bushel for the 2023 crop. This would increase to 221 bushels per acre at a corn price of $5.00 per bushel. By comparison, it took only 149 bushels of corn in 2021 and 178 bushels in 2020 to cover all reported expenses, based on the FBM data.

The last time that we saw a significant increase in crop input costs and land rental rates was during and following the very high farm profitability years from 2010 to 2012. It appears that we have been in another period of high profit years in corn and soybean production in many areas from 2020 to 2022. Based on past history, the biggest impact from increasing input costs and higher cash rental rates usually occurs toward the end of the high profit years and in the following years. This can greatly increase a producer’s risk if there are reduced corn and soybean yields or lower commodity prices in the years that follow the high profit years. It appears that we may be heading into that type of timeframe in 2023 and the next few years. This means that farm operators need to be keenly aware of good risk management practices, such as controlling expenses, sound grain marketing strategies and good use of crop insurance programs, in order to avoid the potential for large financial setbacks in a given year.

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