Looking Ahead to 2011

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  • The breakeven cost of producing corn at trend-line yields will likely be close to $4/bu. for many producers in 2011, and near $9.50/bu. for soybeans
  • Many analysts are anticipating reductions in future farm program payments, due to the large Federal budget deficit and the current high profitability in crop production

 

Next year, 2011, is setting up to be another interesting year in the agriculture industry, following a very excellent year in 2010 for most crop producers in the Upper Midwest, and continued tight profit margins in the livestock sector, especially late in the year. Following are some items that are likely to be on the forefront in the agriculture industry for 2011:

 

Crop Production

The breakeven cost of producing corn at trend-line yields will likely be close to $4/bu. for many producers in 2011, and near $9.50/bu. for soybeans, which are increased compared to 2009 and 2010 levels. The expected 2011 breakeven prices compare to $3/bu. for corn and just over $6/bu. for soybeans as recently as 2008. The good news is that current local forward prices for the fall 2011 are near $5 for corn and $11.50 for soybeans, which should be well above breakeven levels for most producers. Farm operators need to look for ways to control crop expenses for 2011, as well as put together a good grain risk-management plan that utilizes crop insurance and sound grain marketing strategies in order to achieve breakeven and profitable price levels for the coming year.

Crop producers also need to pay attention to the level of cash rental rates are for 2011, and may want to consider a flexible cash lease as an alternative to a straight cash rent lease. A good flex leaseadjusts the final land rental payment, based on actual crop yields and prices during the year of production. There are many good examples of flexible cash leasesand sample cash rental lease agreementsavailable. It is important for producers to know their breakeven price before finalizing land rental rates. Producers also need to be very wary of entering into long-term land rental agreements with high fixed cash rental rates beyond 2011, which may add considerable financial risk the in future.

 

Livestock Production

Even though livestock profit margins improved considerably during the first eight months of 2010, margins were quite tight to negative by the end of the year due to increased feed costs and lower market prices. Market prices for pork, beef and milk should remain fairly strong in 2011 due to strong product demand, both domestically and for export markets. The big question mark will be what happens to feed costs in 2011, which will likely be impacted by final 2010 crop production numbers and usage, as well as 2011 crop planting intentions. Livestock producers may want watch for any temporary downturns in grain markets in order to take advantage of lower corn and soybean meal prices to lock in a portion of their feed needs for 2011. Again, watching breakeven market price levels is important when making forward price decisions for marketing hogs and cattle. Availability of credit could continue to be a major issue during 2011 for some swine, dairy and beef producers in many areas of the U.S.

 

Land Values

Land values ended the year very strong throughout most of the Midwest, including one sale for 80 acres of farmland in northwest Iowa at over $13,000/acre. While that sale was totally unique and not typical, average land values have increased by 10-15% in many areas during 2010. Recently, Iowa State University released their annual Land Value Survey, which showed the average farmland value in Iowa at $5,064/acre as of Nov. 1, 2010 – an increase of 16% compared to a year earlier 93% since 2004. The highest farmland values were in northwest Iowa, with an average land value of $6,356/acre. Most recent farmland sales in southern Minnesota for top-quality farmland have been in the $5,000-6,000/acre range, with some sales a bit higher. Given the current level of grain prices, continued low interest rates and high demand for farmland, the strong land prices are likely to continue in 2011.

 

Renewable Fuels

The past year (2010) was fairly profitable for most of the ethanol industry; however, 2011 shows signs of returning more toward 2008 and 2009, which were very challenging times for the renewable fuels industry. The industry continues to deal with high input costs, unstable fuel prices and government uncertainty. Profitability in the corn ethanol industry declined significantly late in 2010, as corn prices increased in the past few months; however, some ethanol plants had locked in some lower corn prices earlier in 2010 and were able to were able to maintain profitability. The big key to the future of the U.S. renewable fuels industry will likely depend on world oil prices and crop prices for 2011, as well as on U.S. government policy for the long-term.

Congress passed a comprehensive tax bill in December, which extended the 45¢/gal. blenders credit (VEETC) for ethanol production, the 54¢/gal. tariff on imported ethanol and reinstated the $1/gal. tax credit for biodiesel. However, all of these renewable fuels incentives are only in place for one year, until the end of 2011. In addition, the EPA has been slow to adopt E15 blends for widespread use in vehicles, which could slow down the expected increased demand for ethanol. Currently, E15 blends have only been approved by EPA in cars that are 2007 or newer. There is a growing anti-ethanol sentiment among environmental and hunger groups, livestock organizations, taxpayer groups, large food companies and some members of Congress. It is likely that 2011 will be a pivotal year for the future direction of renewable energy policy in the U.S.

 

Government Programs

We are likely to hear considerable discussion about the next farm bill during 2011 by Congress, farm organizations and others. The current farm bill will govern USDA farm programs through the 2012 crop year. Many analysts are anticipating reductions in future farm program payments, due to the large Federal budget deficit and the current high profitability in crop production in many areas of the U.S. The Average Crop Revenue Election (ACRE) program, which was initiated in the 2008 Farm Bill, and initiated for the 2009 crop year, continues to have very low enrollment. Payout through ACRE for corn and soybeans only occurred in a few states in 2009, and will likely again occur in only a few states in 2010. However, as the five-year state average yield increases in Minnesota, and the two-year national average price increases, the likelihood for an ACRE payment for corn and soybeans in Minnesota for 2011 or 2012 increases. Producers again have a chance to enroll in ACRE for 2011 when they enroll in the 2011 DCP farm program at county Farm Service Agency offices.

Best wishes in 2011 to everyone involved in the agriculture industry!

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

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