Grain Markets and Cost of Production Paul D. Mitchell Professor of Agricultural & Applied Economics Director of Renk Agribusiness Institute, UW-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 2014-2018: 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

Break-Even Price versus Iowa Farm Price -------- Corn Price -------- ------ Soybean Price ------ Year Break Even Farm Average 2006 2.83 3.09 7.19 6.58 2007 2.96 4.44 6.73 10.50 2008 3.48 4.13 7.79 10.20 2009 4.32 3.57 9.81 9.52 2010 3.40 5.46 8.67 11.20 2011 3.87 6.35 9.45 12.60 2012 4.23 6.94 10.92 14.40 2013 4.31 4.51 10.95 13.10 2014 4.29 3.70 11.13 9.96 2015 3.52 10.96 8.91 2016 3.99 3.30 10.67 9.34 2017 3.51 3.25 9.66 9.25 2018 3.65* 9.46 8.62* Source: https://www.extension.iastate.edu/agdm/crops/pdf/a2-11.pdf

History of Break-Even Price versus Farm Price in Iowa Corn Break Even prices about $4.25 for corn and $11 for soybeans for many years Due to negative margins, farmers brought break even down to about $3.50 for corn and $9.50 for soybeans Negative margins continue, so pressure remains to reduce break even prices Soybeans

University of Illinois Cost and Returns Estimates Everything above rent line is what you pay yourself and the land Source: https://farmdocdaily.illinois.edu/2018/09/2019-crop-budgets-suggest-dismal-corn-and-soybean-returns.html (9/18/2018)

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 10/09/2018 USDA Farm Price Projections Year Corn Soybean 2018 3.65 8.62 3.30 9.40 2019 3.98 9.29 3.35 9.45 2020 4.13 9.50 2021 4.20 9.63 3.40 2022 2023 3.45 9.60 2024 3.50 9.75 2025 2026 3.55 9.80 2027 3.60 USDA Long‐Term Projections, Feb 2018: https://www.usda.gov/oce/commodity/projections/

Implications Long-term negative margins are not sustainable, break-even prices have been dropping Downward pressure on land rents/prices, machinery, seeds, fertilizer, chemicals, … Previously farmers able to income smooth from the 3-4 good years they had, but not any more Farm debt rising as farmers “eat equity” Source: https://ageconomists.com/2018/09/17/us-farm-debt-continues-its-upward-march/

Farmer Tactics Accept below normal returns to survive for future profits Will the bank let you “eat your equity” to survive? Better marketing: 1 cent/bu x 200 bu/ac x 500 ac = $1,000 Negotiate lower land rents 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 push?) Grain Crops Management in Low-Margin Years http://ipcm.wisc.edu/blog/2017/03/videos-grain-crops-management-in-low-margin-years/ https://fyi.uwex.edu/fieldcroppathology/files/2017/01/TeamGrainsFactSheet_FINAL_2.pdf

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 Apps/tools we looked at Marketing clubs and advice for good marketing services Facilitate custom work or machinery sharing to spread machinery fixed costs over more acres