1. Grain Markets and Cost of Production
Paul D. Mitchell
Professor of Agricultural & Applied Economics
Director of Renk Agribusiness Institute, UW-Madison
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2. Main Points
Cost of production for corn and soybeans had been fairly steady for
: 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

3. Source: http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf

4. 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:

5. 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

6. University of Illinois Cost and Returns Estimates
Everything above rent line is what you pay yourself and the land
Source: (9/18/2018)

7. 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”

8. 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:

9. 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:

10. 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

11. 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