GRAIN MARKETS AND COST OF
PRODUCTION
Paul D. Mitchell
Associate Professor of Agricultural & Applied Economics
University of Wisconsin-Madison
pdmitchell@wisc.edu 608-265-6514
http://www.aae.wisc.edu/pdmitchell/extension.htm
Follow me on Twitter: @mitchelluw
Main Point
• Cost of production for corn and soybeans has been fairly
•
•
•
•
steady for last 4 years
2014 and 2015 market prices are/were below break even
prices
Projected long-term market prices over the next several
years are below break even prices
Long-term: this is not sustainable, something has to give
Short-term: thoughts on what farmers can do
Source: http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf
10 Years History of Cost of Production
Break-Even Price versus Farm Price in Iowa
-------- Corn Price -------Year
Break Even
Farm Average
------ Soybean Price -----Break Even
Farm Average
2006
2.83
3.09
7.19
6.62
2007
2.96
4.44
6.73
11.00
2008
3.48
4.13
7.79
10.26
2009
4.32
3.57
9.81
9.55
2010
3.40
5.46
8.67
12.08
2011
3.87
6.35
9.45
13.08
2012
4.23
6.94
10.92
14.54
2013
4.31
4.51
10.95
13.38
2014
4.29
3.70
11.13
9.98
2015
4.23
3.70
10.96
10.05
About a $0.50/bu loss for corn and a $1.00/bu loss for soybeans
Source: http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf
10 Years History of Cost of Production
Break-Even Price versus Farm Price in Iowa
$8.00
$7.00
Corn
Break Even prices in the
$4.25 range for corn
and $11 for soybeans
for several years
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
2006
16.00
14.00
2007
2008
2009
2010
Break Even
Soybeans
2011
2012
2013
2014
2015
2014
2015
Mkting Year Avg
12.00
10.00
In 2014 and 2015, about a
$0.50/bu loss for corn and
$1.00/bu loss for soybean
8.00
6.00
4.00
2.00
0.00
2006
2007
2008
2009
2010
Break Even
2011
2012
2013
Mkting Year Avg
Source: http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf
University of Illinois Cost and Returns Estimates
Everything above
rent line is what
you pay yourself
and the land
Source: Revised 2015 Corn and Soybean Return Estimates (http://farmdocdaily.illinois.edu/pdf/fdd150915.pdf)
Gary Schnitkey, Department of Agricultural and Consumer Economics, University of Illinois, 9/15/2015.
Why farmers need to estimate their own
cost of production
• Cost estimates per bu or per acre are single averages
• Tremendous variability exists among farmers
Gary Schnitkey “Crop Production Cost and Rotation Decisions”
http://www.farmdoc.illinois.edu/presentations/2007%20items/ifes2007/Farm%20Economic%20Summit%20‐%20Schnitkey.pdf
Long-Term Price Expectations
CME Harvest Futures 9/29/2015
USDA Long-Term Projections
Year
Corn
Soybean
Corn
Soybean
2015
3.88
8.92
3.40
8.50
2016
4.11
8.93
3.50
8.55
2017
4.13
8.97
3.50
8.80
2018
4.14
8.95
3.50
9.10
2019
3.55
9.20
2020
3.55
9.30
2021
3.60
9.35
2022
3.65
9.40
2023
3.70
9.45
2024
3.75
9.55
USDA Long‐Term Projections, February 2015 (p. 64, 69), online:
http://www.usda.gov/oce/commodity/projections/USDA_Agricultural_Projections_to_2024.pdf
Implications
• Long-term, the $0.75/bu loss for corn and $2.00/bu loss
•
•
•
•
•
for soybeans is not sustainable, something has to give
Break-even prices must come down in the long-term by
lower input costs
Land rents, machinery, seeds, fertilizer, chemicals, …
Short-term: looking at another tight year for farmers
Previously they were able to income smooth from the 3-4
good years they had, but not any more
Lots of grain waiting to be sold for better prices that are
not coming
Farmer Tactics for 2015 going into 2016
• Accept below normal returns to survive for future profits
• Negotiate lower land rents for 2016
• Better marketing 1 cent/bu x 200 bu/ac x 500 ac = $1,000
• Reduce variable input costs: fertilizer, herbicide, seed, …
• Sell machinery, keep older machinery, share machinery
• Use yield monitors to find unprofitable parts of fields and
stop farming them
• Switch to crops with lower cost per acre to plant: soybean,
wheat, forage, so smaller operating loans (lenders drive?)
Agricultural Support Industry Tactics
• Get farmers thinking about lowering their cost of
production and doing better at marketing
• Cost of production tools/spreadsheets to help them know
their costs and figure out ways to cut costs
• MRTN nitrogen corn and wheat, Seeding rates, ???
• Crop insurance: RP, 70-80% coverage level, enterprise units
• Marketing clubs and advice for good marketing services
• Facilitate custom work or machinery sharing to spread
machinery fixed costs over more acres
• Try to get ahead of the curve while farmers are harvesting