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 Points Cost of production for corn and soybeans had been fairly steady for 2012-2015 2014-2016: 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

-------- Corn Price -------- ------ Soybean Price ------ 11 Year History of the Cost of Production Break-Even Price versus Farm Price in Iowa -------- Corn Price -------- ------ Soybean Price ------ Year 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 3.52 10.96 9.02 2016 3.99 ??? 10.67 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 Break Even prices in the $4.25 range for corn and $11 for soybeans for several years 2014 and 2015: $0.6-$0.7/bu loss for corn $1-$2/bu loss for soybean Corn 185 bu/A @$0.65 = $120/A loss Soybean 54 bu/A @$1.50 = $81/A loss 2016 = ???? Soybeans

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 10/11/2016 USDA Farm Price Projections Year Corn Soybean 2016 3.46 9.55 3.50 8.55 2017 3.84 9.63 8.80 2018 4.03 9.37 9.10 2019 4.11 9.31 3.55 9.20 2020 9.30 2021 3.60 9.35 2022 3.65 9.40 2023 3.70 9.45 2024 3.75 USDA Long‐Term Projections, February 2016 (p. 64, 69), online: http://www.usda.gov/oce/commodity/projections/USDA_Agricultural_Projections_to_2024.pdf

Implications Long-term, the $0.50/bu loss for corn and soybeans is not sustainable, something has to give Break-even prices must come down in the long-term by lowering input costs 2015 to 2016 in Iowa: corn dropped $0.24/bu, soybeans $0.29/bu 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

Farmer Tactics for 2016 going into 2017 Accept below normal returns to survive for future profits Negotiate lower land rents for 2017 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