Minding Ag's Business

Something's Gotta Give on 2014 Expenses

Corn growers in the AgriSolutions database averaged sizable returns in 2012, but are expected to see much thinner margins in 2013 and 2014 thanks to holdover pricing on rents, overhead and inputs.

If high cash rents and bloated overhead expenses of the past five years are any indicator of the future, high-cost corn producers could be awash in red ink in 2014.

University of Illinois economists expect season prices to average about $4 per bushel in 2014-15, down about 50 cents per bushel from last season's crop, so they are bracing for back-to-back hits on grain producer income. In Illinois alone, that means the state's average cash rents already exceed 2014 expected returns by $41 to $48 per acre, University of Illinois economist Gary Schnitkey concluded in a recent post. But because rents are slow to adjust downward, he doesn't expect much renter relief until 2015.

During 2008-2012 -- a stretch of some of the highest income years in modern grain production -- corn growers in the multi-state AgriSolutions accounting database notched average returns of $130 per acre after all costs. Some individuals even recorded personal bests in excess of $800-per-acre in years like 2012 (see green bars in accompanying chart). However, when corn prices slid abruptly in 2009, the average AgriSolutions operator lost $13 per acre and some growers bled upward of $400-per-acre losses (see red in accompanying chart).

As DTN's Ag Business Benchmark reported recently, the bottom 25% of AgriSolutions' corn growers barely eked out a profit of $26 per acre for their five-year average. They remain vulnerable in the latest downturn.

AgriSolutions' database includes more than 200 real growers in more than a dozen states from the Dakotas to Ohio. Its analysis covered all costs before taxes, including salary draws, equipment depreciation and land rental costs. Operators with owned land charged themselves fair market rent, in accordance with Farm Financial Standard guidelines. AgriSolutions also adjusts for accrual records, so results reflect the crop cycle, not calendar-year tax returns.

"It's not unrealistic for someone who has been chasing high cash rents to show a cost of production at $5.30 per bushel," observed Sam Bachman, a financial consultant with AgriSolutions who has been reviewing 2014 budgets. "2013 results are already being negatively impacted by lower prices on grain held over and sold in 2014. It also looks like the 2014 crop year will be disappointing for anyone who didn't pre-sell grain."

AgriSolutions records show just how toxic high expenses can be. Production costs ballooned 55 cents per bushel per year between the 2008 and 2012 crop, when the group's cost averaged $5.72 per bushel. Many growers in drought-affected areas ended up with real production costs above $6 and $7 per bushel when their yields collapsed due to extreme weather, Bachman noted.

Fixed and multi-year cash rents have imposed a heavy burden on farm operators now that commodity prices have abruptly reversed course, Schnitkey observed. In Illinois, the state's cash rent soared from an average of $132 per acre in 2006 to $223 in 2013. Farm managers report that many market-rate transactions have topped $350 to $500 per acre in that same period.

Some operators who have written their own flex-rent formulas and who have deep landlord relationships feel they have an advantage in 2014. Other operators fuss that flex rents are too hard to explain and too much trouble to administer. Some also contend that flex terms set by farm management groups set base rent too high, so don't really offer any consolation during today's big corn price drops. Other large producers swear otherwise.

"The key here is that our landowners want us to succeed and understand ag may have some rough patches ahead, so they will be reasonable with us," said one flex-rent devotee from Minnesota who didn't mind paying $400 rents when cash corn averaged $7. Land rents in his corn-sugarbeet-dry bean neighborhood have been running as high as $350 to $400 per acre more recently, and his flex-rent formula paid $366 in 2013. If corn should average $4 in 2014, however, his flex formula would automatically lower rent to about $225. That's a major relief valve should prices stay on a crash course with expenses this year.

To read Schnitkey's full post go to http://farmdocdaily.illinois.edu/…

Follow Marcia Taylor on Twitter@MarciaZTaylor


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T Kuster
3/8/2014 | 7:03 AM CST
There are legions of smaller farmers Tim that are opposed to the mindless government insurance schemes that have decimated rural America by government continually targeting larger farmers with the largest investment and income guaranteeing schemes.
Raymond Simpkins
3/7/2014 | 10:27 AM CST
I know what catagory your in Tim.
Tim Haugen
3/7/2014 | 9:34 AM CST
Go back to browsing the EWG website where these types of anti-rural America fallacies are acceptable. Or maybe you could try staying on topic with the blog.
Raymond Simpkins
3/7/2014 | 7:40 AM CST
I hope no one listened to Agrisolutions and sold ahead. Prices are higher now than anytime last year.The guys who lost upward of 400.00 an acre in 2009 should no longer be farming,and would not be if goverment didn't save them every season.They are not vulnerable as long as they have that guarantee.Crop insurance eliminates any free trade,as long as end users are guaranteed so many acres are PLANTED EVERY YEAR.We have to plant with demand, not because the goverment wants to guarantee so many acres each year.The guys that are farming every year on the goverments shirttails are an end users dream.
3/6/2014 | 8:47 PM CST
Bravo T Kuster!
T Kuster
3/6/2014 | 7:58 PM CST
Being that most of us farmers as well as other people of integrity can agree that the recent explosion in crop production costs has been exacerbated and driven by the insane and extreme government investment/profit guarantees offered farmers perhaps you Marcia can request these university economists push the numbers and tell us just how much more we farmers have to pay for land, machinery, and other crop input costs because of these multibillion dollar government spending schemes. After all these university personnel are public employees and the least they can do is provide us with some estimates of how we are financially harmed by this big government largess.