How to know if you’re making money in low price era for grain
The key to knowing if you are making any money selling grain is knowing your cost of production. That was lesson #1 in your Vo Ag Class, at the Extension marketing meeting, and one of the initial questions your lender asks about. Calculating and knowing your breakeven price will help know if your latest grain sale was at a profit or at a loss. For the past few years, that has not been an issue. For the next few years, it will be a major issue.
Not all farm operators pay cash rent for land they farm, but many who do have seen their break-even costs rise over the past 10 years due to higher levels of rent. Throughout Illinois, and regardless of soil type, that has been the case. And as a result of cash rent levels that have ratcheted higher, so have break-even costs of production.
click image to zoom University of Illinois farm management specialist Gary Schnitkey says in 2004 break-even prices for corn production averaged $1.67 per bushel. From that time to now, break-even prices have increased each year, and in 2013, they are $4.65 per bushel of corn. He says increases in both non-land costs, such as seed, fertilizer, and labor have lead to the increases along with higher cash rents.
Schnitkey’s calculations of average cash rents and non-land costs point to $4.31 as an average break-even cost of production for 2014. That is below 2013 levels, due to lower fertilizer costs, and he is projecting 2014 yields to be better than 2013. The combination helps to lower the break-even cost.
The critical issue is that cash grain bids for 2013 fall delivery are $4.40 per bushel, and that is below the projected $4.65 break-even level. Cash bids for 2014 fall delivery are near $4.35 per bushel and that is near the $4.31 per bushel break even level. Schnitkey says corn prices in the low $4 and high $3 range are possible over the next several years, leading to the possibility of losses.
There are some possibilities that break-even prices may decline over time. Non-land cost could decrease; however, this process will be slow and there are limits to likely non-land cost decreases. Further decreases in break-even prices are possible with cash rent decreases. However, cash rents tend to be “sticky”. This suggests a protracted period of losses would have to occur before cash rents decline.
The breakeven price for beans also is going higher, and higher levels of cash rent has been the primary driver to no surprise. Farmland that has been rented for average levels meant that it would cost about $5 per bushel to produce soybeans ten years ago, but that has climbed to more than ten dollars per bushel in the past 10 years.
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