Louis Watkins feels one of the main reasons he's still farming at 70 is his ability to wisely lock in major farm inputs that might otherwise cut into profits for even $3.50 corn and $8-9-plus soybeans.
The Vanduser, MO, grower farms with his sons, David and Darin, where his grandfather broke land when horses and mules still pulled planters and plows. And since the 1970s, he has worked to get his fertilizer and/or seed costs locked in four or five months early when applicable.
If 2007 high input costs and projections for continued steep invoices for inputs in 2008 are any indication of what to expect, getting inputs priced early could pay dividends come next fall.
It's a fact across the Corn Belt and other production areas.
For example, total non-land costs for corn are projected at $314/acre in 2008 in central Illinois, an increase of $57/acre from 2001 to 2005, says Gary Schnitkey, University of Illinois agricultural economist, in a report on directions growers should consider to help determine their cash rents and breakevens for 2008.
Schnitkey adds that soybean inputs for non-land costs will approach $200/acre, up $28/acre from the 2001-2005 period.
Watkins has seen too many situations in which input costs got out of hand at the time fertilizer, seed, fuel and other materials were needed the most. He wants to prevent such scenarios.
“We locked in our fertilizer for 2007 last year (December 2006),” says Watkins, whose crop rotation includes corn, soybeans and cotton. “We locked in nitrogen (N) for $198/ton. That's probably 30% lower than it cost a few months later. We also bought our corn seed in December and saved 30-40% over what it would have cost in March or April.”
It was a logical call on his part to buy early. Corn prices started going up last fall (2006) and were forecast to take off even more in 2007. “I knew that if the price of corn went up so would fertilizer,” says Watkins. “They were talking about$250 or higher (some even predicted the $400-500 N that resulted).”
The difference between $200 for N and the local $300 price Watkins would have paid at application is about $25/acre. It would have been much more for $400 N.
That's according to the USDA Energy Estimator tool for N at http://nfat.sc.egov.usda.gov/. The tool helps growers estimate the cost of their N based on current prices for anhydrous ammonia and other forms of N.
With the tool, a grower can enter his zip code, then follow a few simple instructions as to which crops will receive N applications, the amount he plans to apply per acre and the cost of the N, either per pound or per ton.
Knowing this information can help a grower determine whether he wants to lock in the current price. Economist Schnitkey says those costs, along with others,will surely be higher for 2008.
“Locking in at least some of the fertilizer is a pretty good idea,” says Schnitkey, pointing out that even though late-summer anhydrous prices were in the $500 range in Illinois, prices for spring-applied N are still uncertain.
In outlining projected budgets for corn and soybeans, Schnitkey's information through the Illinois Farm Business Farm Management program breaks down likely production, commodity prices and anticipated input costs for 2008.
For example, for a typical central-Illinois farm, the projected corn yield is 178 bu./acre, with soybeans at 52 bu./acre. With a price of $3.50/bu. for corn and projected government payments of $27, the gross revenue is $650/acre. A projected soybean price of $8.50/bu. and $27 in payments will produce gross revenue of $442.
Direct input costs, however, quickly add up to $207/acre for corn. That's based on a fertilizer cost of $90/acre, seed at $48, pesticides at $40, drying and storage at $18 and crop insurance at $11.
Add to that $59 for machine hire/lease, utilities, fuel and oil,machine repair and other power costs and machine depreciation. Overhead costs for labor, interest, building repair and depreciation and insurance add another $48 in total non-land costs.
That puts total corn non-land input costs at $314, which deducted from the $650 gross return, still leaves a return of $336/acre. Total non-land costs for soybeans were $199, leaving a return of $270.
Those 2008 projections compare to 2001-2005 average total non-land input costs of $257 for corn and a $200 return based on a $2.22/bu. price. The big difference in input costs was fertilizer, where the 2001-2005 cost was $63/acre,compared to $90 for 2008.
For soybeans, 2001-2005 input costs were $171, leading to a $181 return based on $5.89/bu. soybeans.
Chris Hurt, Purdue University Extension economist, says that even though prices are higher now for corn and beans, they remain highly volatile. And the volatility seen in prices, as well as inputs, make it difficult for growers to know when to buy and when to sell.
“A diversified plan may help get you through such situations,” he says. “That may be as simple as pricing inputs in three blocks in three different time periods. It might also mean making crop sales in three time periods. That's only an example, but one that could help relieve some of the confusion.”
He warns growers not to lock in inputs without seriously considering forward pricing their crops, especially if cash rent is involved.
“There are some people paying $300 cash rent who can be looking at a loss of $150/acre,” he says. “They might have been thinking corn would be $4 and instead it sells for $2.70.
“If the inputs are locked in figuring on the $4 price, then steps should be taken to protect that price,” Hurt says.
Watkins, who still does more “spreadsheets in pencil” than on a computer, started securing inputs 30 years ago, when he finally had the resources to make early expenditures.
“That's (locking in inputs) probably why I am still farming today,”he says. “I've tried locking in some fuel before, but N and seed can help you benefit the most.”
He isn't shy about making early crop sales when a profit is at hand. “We try to market corn ahead,” he says. “When I get a price I know is a good price and will produce a reasonable profit, I sell. I find I can do much better that way.”
Watkins admits he hasn't been perfect in marketing or getting inputs locked in. “It doesn't work every time. Sometimes you get whupped. “I've bought N in October or December and the next April it was 20% less. But that doesn't happen very often. The same goes for seed,” he says.
“I made some corn sales a few years ago when it hit $3.36, but I should have made more. I've messed up some on pricing and inputs. So has just about everyone else. You just have to try and make decisions that will produce a profit,” Watkins says.
For more on projected 2008 budgets in Illinois and how they might apply to your farm, go to www.farmdoc.uiuc.edu/manage/newsletters/fefo07_12/fefo07_12.html.