High yields across the upper Midwest in 2015 may have saved many producers from falling below breakeven — especially if they sold on price rallies. However, the doom and gloom predicted for high-cost corn and soybean farmers is likely just postponed one year, speakers at the American Bankers Association’s annual ag bankers conference emphasized.
While 2016 corn input costs for southern Minnesota farmers could run $760 per acre ($36 an acre less than in 2015), “unless we have another bumper crop or an unexpected price recovery, breakeven cost for average yields will be above $4.25 cash corn,” said Bob Craven, Center for Farm Financial Management, University of Minnesota. That’s assuming a $12-per-acre drop in average cash rent to $226 per acre in 2016. This is in an area with a 2013 average cash rent high of $250 on 175-bushel-per-acre corn ground. The same land produced over 200 bpa corn in 2015, he estimated.
However, whether you see a loss or profit will depend if you are above or below the average on your expenses. According to the University of Minnesota’s FINBIN data, southwest Minnesota high-cost producers are looking at a $120-per-acre projected loss with typical yields of 175 bpa and $4.25 cash corn (an optimistic goal). On the other hand, the low-cost (more profitable) producers with similar 175 bpa yields and $4.25-per-bushel corn would net a positive $87 per acre. That’s a difference of $207 per acre — and the difference between paying your bills and not.
“Some farmers are in very good shape to face the expected financial downturn in agriculture,” said Craven. “Others will struggle.” The Center for Farm Financial Management compared the top 20% of the farmers in their FINBIN data bank with the bottom 20% to see what made the difference.
“The surprising thing was nothing major stood out,” said Dale Nordquist, associate director of the Center for Farm Financial Management. In fact, the data exposed several myths.
MYTH 1: Low-profit farmers rent most of their land.
High-profit producers owned only 29% of their crop acres. Low-profit operators owned slightly less — 23% of their crop acres. The data was gathered from about 10,000 actual farms in eight states (from Michigan to Utah and Minnesota to Missouri) using 2014 numbers.
MYTH 2: Low-profit producers are young farmers.
The average age of the high-profit producers was 51, whereas the average age of the low-profit operators was 48 years old.
MYTH 3: Economy of scale makes a huge difference in farm profitability.
The difference between the 20% of operators who were “low profit” versus the 20% of operators who were “high profit” was 443 acres. Total crop acres for the high-profit farmers averaged 2,147, while the low-profit group averaged 1,704 acres.
MYTH 4: High-profit producers farm the best ground.
Average corn yields for the high-profit producers were 165 bpa — only 14 bushels better than the low-profit producers. Wheat yields differed by 7 bpa (64 bpa for high-profit producers versus 57 bpa for low-profit farmers).
MYTH 5: High-profit farmers do a better job marketing their crop.
While it’s true, they got a higher price, the differences weren’t that outstanding. High-profit producers in 2014 marketed $4.42 corn, $11.85 soybeans and $6.58 wheat. The low-profit farmers received an average of $4.20 per bushel for corn, $11.45 for soybeans and $6.08 for their wheat.
MYTH 6: Low-profit farmers have high machinery investment.
The last time the low-profit producers had a higher per-acre machinery investment in the data group was in 2012, according the FINBIN data. In 2014, the amount of machinery invested per acre was about equal for the high- and low-profit producers at $650 per acre.
So, you would think with such small differences, there wouldn’t be much of a spread between the most and least profitable operations. “What we found was those small differences add up to big numbers when totaled,” said Nordquist. The high-profit group had a net farm income of $218,000 on gross sales of $1.3 million. The low-profit group had a $90,000 loss on gross sales of $1 million.
More telling, the high-profit group owned $845,000 in working capital compared to only $183,000 working capital held by the low-profit group. That gives the higher-profit group a much better cushion to withstand ag’s downturns.
“It is a lot of little things that make the difference — a little better marketing, a little better yields, more attention to lowering costs. That’s what will keep producers in business in the years ahead,” Nordquist said.