Crop farm profits will be highly variable
Ask a farmer what their profit levels from crop farming are in 2019, and the answers can range from "fairly good" to "reduced" to "right down terrible."
Any of those answers could be correct, even in the same area, depending where the farms are located and how the erratic weather impacted their crops. There also will be a variation in grain marketing decisions and crop insurance coverage for the year that could affect farm profit levels.
The following is an overview of how some major factors are likely to affect farm profitability in 2019:
Mother nature has not been kind to many farmers in portions of Minnesota, Iowa, North and South Dakota, as well as in some other areas of the Upper Midwest. Several locations received 150 to 200 percent of their normal rainfall during the growing season. This resulted in very late planting and significant prevent plant acres in some areas, as well as delayed harvest which dropped crop yields. Some locations in southern Minnesota and eastern South Dakota also experienced severe "green snap" on corn because of severe storms in July.
Overall, corn yields in affected areas were 10% to 20% below long-term averages, and probably 15% to 30% lower than 2015-2017 average yields. Soybean yields were 5% to 20% below long-term average yields. At a farm-level price of $3.50 per bushel, a farm operator with a corn yield of 210 bushels per acre will gross $735 per acre, while a producer with 175 bushels per acre grosses $612.50 per acre, and a producer with 140 bushels per acre only grosses $490 per acre.
Grain marketing decisions
As in most years, the grain marketing decisions that were made by farmers will have a big impact on the profit levels for the year. The biggest difference will likely come in corn, where producers in many areas had the opportunity to lock-in June and July cash prices near or above $4.00 per bushel on a portion of their yield. Current corn cash price levels are near $3.50 a bushel in southern Minnesota, and even lower in other areas.
For example, Farmer A and Farmer B both targeted a yield of 200 bushels per acre for corn at the beginning of the year; however, due to the weather, they only had a final yield of 170 bushels per acre. Farmer A locked-in 75 percent of the anticipated production (150 bu./acre) at $4.00 a bushel and sold the balance at $3.50 per bushel. Farmer B sold his entire production for $3.50 per bushel. Farmer A would have a gross income of $670 per acre, while farmer B would have a gross income of only $595 per acre, a difference of $75 per acre.
There have been very few opportunities to lock-in a favorable local cash soybean price during 2019. One positive for local soybean prices in recent weeks has been a tighter basis level, which is the difference between the Chicago Board of Trade price and local price offered to farmers. The soybean basis level at processing plants in southern Minnesota tightened from $.50-$.60 per bushel in mid-September to $.15-$.20 per bushel in mid-November. Taking advantage of a $.30-$.40 per bushel soybean basis improvement can easily add $15-$25 in gross income per acre. Grain marketing opportunities are often short-lived and need to be acted on promptly to get the full advantage. Grain marketing decisions are often overlooked as a major factor that impacts farm profitability.
The 2019 Market Facilitation Program payments, which are being paid to farm operators to offset market price reductions resulting from tariffs and trade issues, are being allocated on a per-acre basis. As a result, the MFP payments are not affected by crop yields. Even though the MFP payments were not intended to help cover losses from low yields in 2019, these payments will help stabilize final farm income levels for many farm operators.
Crop insurance coverage The level and type of insurance coverage that a producer carried will also impact farm profitability. Corn and soybean producers had the option of selecting revenue protection (RP) crop insurance policies ranging from 60% to 85% coverage levels. The level of insurance coverage can result in some producers receiving crop insurance indemnity payments, while other producers receive no indemnity payments, even though both producers had the same adjusted APH yield and the same final yield. For example, at an adjusted APH corn yield of 190 bushels per acre and a final yield of 150 bushels per acre, a producer with 85% RP coverage would receive a gross indemnity payment of $61 per acre, while a producer with 75% coverage would receive no indemnity payment.
Many farmers in portions of the Upper Midwest had some prevented plant crop acres and, depending on their crop insurance coverage, received an indemnity payment on those acres. Producers with crop insurance coverage received 55 percent of their guarantee for prevent plant corn acres and 60 percent of the insurance guarantee on soybean acres. Producers with higher insurance coverage levels (80% or 85%) received higher prevent plant payments.
A large majority of Midwest corn and soybean producers chose "enterprise units" for their crop insurance coverage, in order to reduce premium costs. This combines all acres of a crop in a given county into one crop insurance unit. By comparison, "optional units" allow producers to insure their crops separately in each township section, which can be a big advantage in a year such as this. For example, assume that farmers A and B both have five separate farms within the same county with an APH corn yield of 190 bushels per acre, and with an overall average corn yield of 171 bushels per acre. However, three of the farms average 185 bushels per acre and two of the farms average 150 bushels per acre. Producer A has an 85% RP policy with optional units and producer B has an 85% RP policy with enterprise units. Producer A would receive no insurance indemnity payment on three farms; however, would receive a gross insurance payment of $61 per acre on two farms. Producer B would likely receive no insurance payments on any farms.
Corn and soybean producers with average or above average yields will likely have an average to fairly good profit year, depending on their grain marketing decisions. Farm operators who had average to slightly below average yields for the year will probably have reduced to poor profits, depending on grain marketing decisions. Finally, farmers with below average to very low crop yields will likely have reduced to disastrous profit levels for the year, depending on their crop insurance coverage and grain marketing decisions.
Farmers facing serious year-end cash flow shortages are encouraged to consult their farm management advisers and ag lenders sooner rather than later to look at ways to address the situation.