Todd's Take

It is no secret that 2015 has been a tough year for farmers trying to make money on corn. USDA's cost of production estimate for corn in 2015 is $3.98 a bushel, and DTN's national index of cash corn prices has only been above that level two days this year. On July 10 and 13, traders were briefly worried about the impact of heavy rains from Missouri to Ohio. As of Friday, DTN's corn index stood at $3.50, far less than profitable for many.

However, USDA's national estimates don't tell the whole story, as production costs vary widely by farm. For example, farms with higher corn yields than USDA's 169.3 bushels an acre will tend to have lower production costs, a benefit for many in the Western Corn Belt this year.

The other big factor in a farm's cost of production is land expense. In 2015, USDA estimated land expense at $178.82 an acre, or 27% of corn's $3.98-a-bushel total cost. Keep in mind that for those who are not renting ground or making interest payments but own their land outright, the cost of producing corn is much lower, at $2.92 a bushel. For many making payments or farming a combination of owned and rented ground, the cost falls somewhere in between. The 2012 U.S. Census of Agriculture reported that 38% of U.S. farm acres were leased.*

While nearly everyone understands the basic math of how cost affects profitability in any given year, many may be surprised to find out how higher land expense hurts their chances for success over time. To bring the point home, I put together a comparison of two charts.

The first chart showed December corn prices over the past 40 years divided by USDA's cost of production without land expense. The second chart showed December corn prices over the same time period divided by USDA's full cost of production. Of course, the first chart showed December corn offering a more profitable range of results. But played out over time, the experiences of the two were as different as day and night.

First, the good news. If you were fortunate enough to farm ground over the past 40 years that you owned outright and had something close to USDA's national costs and yields apart from the land expense, you saw opportunities where December corn prices traded above cost every year. In fact, in 29 of the 40 years, December corn never traded below cost during the January-to-Nov. 30 period.**

Even more telling, in 37 out of the past 40 years, December corn offered a profit of 20% or more with a 246% gain possible in early 2008. Overall, farming your own land was such a big advantage that it would have been hard not to succeed -- and that does not even take into account the land's increased value over time. Lots of businesses would love to have those kinds of returns.

For the second chart, which included USDA's estimated land expenses in the cost of production, the road to profitability has been much tougher. Twenty-nine of the past 40 years saw December corn prices fall below the cost of production at some time during the year. On the brighter side, 21 of the years -- roughly half -- saw opportunities to sell December corn at a premium of 20% or more above cost, but 14 years also saw prices drop 20% or more below cost. Success in any given year was a hit-or-miss proposition.

Like flipping a coin for heads or tails, the worst part of this more expensive cost structure is that sometimes you flip three tails in a row. That happened in the mid-1980s and the late-1990s when December corn prices offered virtually no profitable selling opportunities for stretches of three and four consecutive years. Not too many family budgets could survive three years of no income.

The point of this comparison is not to discourage young farmers renting ground, but to encourage serious and sober thought about the challenges ahead. Farming rented ground is a hostile market environment that demands extra attention to costs and risk-management options.

I realize the message of getting costs down and yields up is nothing new, but for some, it can be a helpful exercise to stop and think about where you are headed in the next 10 or 20 years and the odds of getting there.

* According to the 2012 US Census of Agriculture, 38% of U.S. farm acres are leased. Found in Table 11 on page 28: http://www.agcensus.usda.gov/…

** To keep the study simple and avoid the period when futures are delivered, December corn prices were used in each calendar year from Jan. 1 to Nov. 30. Basis is also an important factor, but was not included in this comparison as it varies widely by location.

Todd Hultman can be reached at todd.hultman@dtn.com

(AG/CZ)

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