Farm Finances • June 2015

Warning: Reading this may cause you to rent your land, instead of farming it. That disclaimer is needed with an economic analysis that it cost $1,000 to raise an acre of corn in Illinois last year, which put breakeven prices from $4.34 to $5.10 per bu. IL Farm Business Farm Management economists calculated those numbers for corn, and similar numbers for soybeans, which ranged from $758 to $665/acre and $11.23 to $12.21/bu. How did you do?

» Corn production expenses dropped 2% from 2013. “Variable costs decreased $11 per acre or 2 percent, other non-land costs increased $8 per acre and land costs increased $27 per acre. In 2014, cash costs accounted for 47% of the total cost of production for corn, other non-land costs were 25%, and land costs were 28%. The average corn yield for all combined areas of the state was 217 bu. per acre resulting in a total cost of production of $4.56 per bushel. The average corn yield was the highest on record. Total costs per acre were the highest on record and total costs per bushel were the lowest in the last 4 years.”

» Soybean production expenses increased from 2013 to 2014. “Variable costs accounted for 32% of the total cost of production for soybeans, other non-land costs 30% and land costs 38%. The average soybean yield across the state was 62 bu. per acre resulting in a total cost of production of $11.73 per bu. The average soybean yield was the highest on record. The cost per bushel to raise soybeans the last 5 years averaged $11.54 per bu.”

If the question is where farmland values are headed, “The answer will likely depend upon how market participants expect revenues and costs to adjust going forward.” That is the contention of Purdue economist Brent Gloy, who characterized land values as the bellwether of the US farm economy. “With prices now trading below the baseline projections (of commodity prices) it is becoming clear that if these prices hold for several years there will be pressure on farmland values to end their upward march and likely fall.”

10-Year Corn Price and Cost Projections

10-Year Corn Price and Cost Projections

But low commodity prices are not the only dynamic impacting farmland prices. Gloy says returns over variable costs are substantially declining, and are a function of increasing variable costs of production as estimated by USDA. He says, “If USDA’s projection were to come true, 2015 variable costs would consume 59% of revenues as opposed to 46% in the 2013 projection. Gloy says while prices declined 15¢ per bushel from 2014 to 2015, the variable costs for producing a bushel of corn increased by 31¢. “Combined, the hit of higher variable costs and lower output prices results in a reduction in returns over variable costs of $92 per acre per year from the analysis conducted using the 2014 projections.”

If your financial statement has caused you to visit a lender for the first time in a long time, it is good to know that low interest rates are holding and are helping support farmland values. The Kansas City Fed said farmland loan volume grew in the last quarter of 2014 by nearly 7% and production loans rose by 10%. Across the Cornbelt interest rates averaged 4.59% on variable rate mortgage loans and 5.19% on fixed rate loans.

fixed rates for long term farmland loans
Source: Farmland Investor Letter analysis of Federal Reserve data.
What is your profit threshold? One Cornbelt reader worked the numbers for his farm and with $8.75 for fall delivery beans and $300 cash rent, he breaks even at 69 bu. beans. Soybean production breaks even at 38 bu. on land he owns. For corn, priced at $3.33 for fall delivery, grown on land with $300 cash rent, he breaks even at a 240 bu. yield. On land he owns, the breakeven yield is 160 bu. Your numbers will be different, but maybe not by much. However, knowing your breakeven price certainly helps your marketing plan.

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