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Looming price risk ahead for corn, soybeans

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A year ago at this time, the local cash corn price in southern Minnesota was near $7 per bushel, compared to slightly over $4 per bushel in late February this year. This is lowest cash corn price in late February since 2010. In recent years, we kind of got drawn into a mentality that corn prices of $5-7 per bushel were the “new normal,” rather than a temporary price upswing; however, that type of thinking could change quite dramatically in the coming years. Farm operators need to start planning now for much lower crop price levels in the coming years.

Local cash corn prices for the 2013 crop year have been below $4.60 per bushel at most locations in southern Minnesota since September 2013. However, there have been temporary opportunities to get higher local prices, with a reduced local basis from Chicago Board of Trade (CBOT) prices, due to fairly tight short-term corn supplies at some locations. A large amount of 2013 corn that is stored on farms has not yet been forward priced for delivery later this spring or summer, and will be subject to future changes in the cash corn market. The local cash soybean price today is slightly over $13 per bushel, compared to near $15 per bushel a year ago. A much larger percentage of 2013 soybeans have already been sold, or under forward contract for future delivery, as compared to corn.

USDA is currently estimating U.S. on-farm corn prices for 2013-14 marketing year in a range of $4.20-4.80 per bushel, or and average of $4.50 per bushel. The 2013-14 marketing year is for corn raised in 2013, and runs from September 1, 2013 through August 31, 2014. The estimated average U.S. on-farm market price for corn for the 2013-14 marketing year is far lower than the U.S. average corn price of $6.89 per bushel for 2012-13 marketing year, and is also well below the $6.22 per bushel average price for 2011-12, or $5.18 per bushel for the 2010-11. USDA is now estimating on-farm soybean market prices for the 2013-14 marketing year in a range of $11.95-13.45 per bushel, or an average of $12.70 per bushel. By comparison, the average U.S. on-farm market price for soybeans for the 2012-13 marketing year was $14.40 per bushel, after being $12.50 per bushel for the 2011-12, and $11.30 per bushel for the 2010-11.

The biggest concern with the drop in corn and soybean prices may be for the 2014 crop year and beyond. Many farm operators, suppliers, landlords, and others are making the assumption that we will see higher crop price levels in the future than currently exist. There is a lot of evidence to suggest that this may not be the case. As of late-February, the local new crop price for both 2014 and 2015 corn in Southern Minnesota is near $4.15 per bushel. The local new crop price for 2013 soybeans is near $11 per bushel, and near $10.25 per bushel for 2015. These price levels are below current breakeven price levels for many producers in the region.

The breakeven cost of producing corn at trend line yields will likely be close to $4.50 per bushel for many producers in 2014, and near $11.50 per bushel for soybeans. Breakeven price levels could rise even higher for producers that experience reduced crop yields in 2014, or for farm operators with higher than normal land costs. The expected 2014 breakeven prices compare to just over $3.50 per bushel for corn and near $8.00 per bushel for soybeans as recently as 2008. Cash rental rates for farm land have increased dramatically in recent years in many areas of the Upper Midwest, and can be a large variable in the producer break-even prices for corn and soybean production across the region. Crop input costs for seed, fertilizer, chemicals, and fuel have also risen substantially in recent years.

In the latest USDA long-term agricultural projections for the next ten years (2014-2023) that were recently released, USDA is projecting a sharp decline in average corn and soybean prices in the coming years. USDA is currently estimating an average U.S. on-farm corn price of $3.65 per bushel and an average soybean price of $9.75 per bushel, for the 2014-15 marketing year, which will be for the crop produced in 2014. USDA is projecting the average on-farm corn price to drop to $3.30 per bushel for the following year, while estimating on-farm soybean prices to average only $8.85 per bushel for the 2015-16 marketing year. USDA is estimating average on-farm prices for the next decade (2014-2023) to average near $3.75 per bushel for corn, and near $9.50 per bushel for soybeans.

Many grain marketing analysts feel that the USDA price projections for corn and soybeans in the next decade (2014-2023) are too pessimistic, feeling that USDA may have over-estimated production and under-estimated crop usage. However, we must also remember that the U.S. has had some reduced crop production years recently, as well as having very strong domestic and worldwide demand for grain. If production increases and demand stabilizes, we could start to see the corn and soybean ending stocks start to build in coming years, which will tend to lead us toward the lower crop price levels.

Many farm operators are already aware of the much tighter profit margins and cash flow projections for the 2014 crop year, and realize that margins could become negative for 2015, if the USDA projections become reality. Producers need to start planning ahead by looking for ways to reduce crop production costs for 2014 and 2015. There will likely be a premium for the farm operators that have solid grain marketing in place, and optimize their crop insurance coverage, as part of an overall farm risk management strategy. Farm operators will also need to analyze the various farm program options available in the new farm Bill, beginning with the 2014 crop year, to see what option is best on their farms. Any farm program payments for the 2014 crop year will not occur until October, 2015.

Probably the biggest variable that many farm operators need to address before the 2015 crop year are their average land rental rates, many of which are currently too high to reach breakeven levels with current corn and soybean price projections. An alternative to the proposed high cash rental rates for 2014 and beyond may be for producers and landlords to consider a flexible cash lease rental agreement. The flexible agreements allow the final cash rental rate to vary as crop yields and market prices vary, or as gross revenue per acre exceeds established targets, which are based on average cost of production. There are many variations to setting up a flexible lease agreement between a landlord and farm operator. To receive more detailed information on flexible cash leases, contact Kent Thiesse at (507) 726-2137 or via e-mail at: kent.thiesse@minnstarbank.com.

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