DUBUQUE, Iowa — The long-run agricultural outlook is excellent, but agriculture is a commodity-based business and farmers can't expect $5.50 corn forever, Gary Schnitkey, University of Illinois farm management specialist said at the recent Tri-State Agricultural Lender's Seminar in Dubuque.
"We're going back to reality in 2014 with $4.60 corn and $11 soybeans," Schnitkey said. "We'll see periods of $5 corn again and periods, maybe next year, where corn is below $4."
In response to the changing income scenario, farmers will need to reduce capital expenditures.
"That's pretty obvious," Schnitkey said. "They've been spending money like drunken sailors on machinery and that has to stop. They will also have to look at cash rent reductions on some farms."
Most farms are going to be fine, Schnitkey said.
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Some high-risk farms that have a vast majority of their acres cash rented at high cash rents will be hard-pressed to make those farms work in the environment agriculture is moving into without reducing cash rents.
From 1975 to 2005, corn prices averaged around $2.40 per bushel, Schnitkey said. In 2006, U.S. agriculture reached what many believe is a higher price plateau driven by ethanol and strong export demand. It's in the 4.50 to $4.80 range, not $6.
"The last three years we've had prices above that primarily driven by supply problems around the world," Schnitkey said. "We've been seeing that come down. In 2014 if we have an average- to above-average crop, prices could fall below $4 at harvest time and much of the next marketing year. That didn't happen all that long ago. In 2009 our average corn price was $3.50."
Non-land costs for producing corn and soybeans hit all-time highs in 2012. Central Illinois prices peaked at $581 per acre, up $279 per acre since 2006.
Fertilizer costs were $200 per acre in 2012, up $83 per acre since 2006. Schnitkey expects that to drop to $120 to $130 per acre in 2014.
"We could see a very large drop in fertilizer costs," Schnitkey said. "The rest of the costs are not likely to go down or go down very quickly."
In 2012 anhydrous ammonia prices in Illinois were in the $800 to $850 per ton range. It's now in the $680 per ton range, with some people projecting it could come down into the $400 range.
"I'm not there, but there are forces that may cause it to come down further," Schnitkey. "One of the reasons for the decline is historically wide spread between fertilizer price versus cost. We had an $800 per ton anhydrous price when the major ingredient, natural gas, was very low priced. Fertilizer manufacturers were making very good profits and expanded production."
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Plant expansions have occurred, including a new plant under construction in Iowa. Another plant is planned for either Illinois or Iowa.
Diammonium phosphate prices are coming down and potash prices should decline slightly as well.
"Fertilizer prices will be down, which will bring production costs down — not to pre-2006 levels —but we will see some cost modifications," Schnitkey said.
Operator and farmland returns, which were very high in 2011 and 2012, will be lower in 2013 and 2014. In northern Illinois, operator and farmland returns for a two-thirds corn, one-third soybean rotation were $540 per acre in 2011 and $490 in 2012, according to data from Illinois Farm Business Management. Based on $4.60 corn and $11 beans, returns are projected to be $303 per acre in 2013 and $310 in 2014.
"We had record net farm income for grain farms in 2012 in Illinois of $295,000," Schnitkey. "I'm projecting that will drop to $120,000 in 2013 and $110,000 in 2014. If you compare that to the last three years, it's much lower, but it's still higher than we had in the 2000 to 2006 period. It's not the 1980s, but isn't as good as it has been, and it will put some farms in stress."
He showed a farm income simulation for a 1,200 acre northern Illinois grain farm with two-thirds corn and one-third soybeans. The farmer owns 120 acres, share rents 360 acres and pays fixed cash rent of $260 per acre on 720 acres. The farmer will get $120,000 income for that farm in 2014.
If all rented land is cash rented, the income is nearly identical at $119,760. If the cash rent increases from $260 to $300, income drops to $76,600. If the farmer owns no land and rents all 1,200 acres at $300 dollars per acre, the income drops to $44,160.
"There is a big buffering capability from owning just 10 percent of the acres," Schnitkey said.
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Most farms will do fine with the projected price decline in 2014.
"We're not moving into the 1980s, but we'll probably see some more defaults and tough decisions," Schnitkey told lenders. "The profile of the problem farm is someone who has been very aggressive cash renting land, grew their acres fast, leasing their equipment and using a lot of dealer financing. Many of these farms probably wouldn't have met some lender standards to get loans."
