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Dairy Talk

RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

$5 Corn the New Normal

Feb 13, 2012

Corn growers see good times now, but their markets may be headed to a new equilibrium as their production costs climb. The bad news is that dairy producers will have to live with this new normal.

 
I had the opportunity to spend a few days at the Top Producer Seminar in Chicago a couple of weeks ago. I have to admit, it was a little weird mingling with 800 corn and soybean growers so happy with their fat balance sheets that they couldn’t stop grinning.
 
Speaker after speaker after speaker was pretty clear on one thing: $6 corn means most of these row croppers are pulling in net profits of $200 per acre if their yields run anywhere near 180 bu./acre. That ain’t bad if you’re farming 2,000 or 4,000 or more acres of corn on corn, as some of these guys are. And then if the government lets you write off the entire cost of a new tractor or a new combine as they could in 2011, it gets even better. I’d be smiling, too.
 
But speaker after speaker after speaker also said that the cost to produce a bushel of corn is approaching $5/bu.
 
• Sterling Liddell, vice president of Food and Agriculture Programs for Rabobank, pegs the cost of production in Midwest cornfields between $4.30 and $4.90/bu.
 
• Brett Oelke, a University of Minnesota ag business management team leader, pegs the average at $4.82, with a range from $4.50 to $5.00. "The cost of corn production is the same regardless of where you’re at in the country if you’re making full use of your machinery," he says. The reason: On better land, yields might be higher. But those higher yields drive land prices and rents higher, so that the bottom line costs come out pretty much the same as lower yielding, lower priced ground.
 
• Darren Frye, president and CEO of Water Street Solutions, a Peoria, Ill., farm consulting firm, says the first 250 of his clients to submit completed farm records  showed a breakeven projected 2012 corn price of $5.21. "Typically, farms have 50¢ to 60¢ higher cost of production than they think when you include family living and some return to management," he says.
 
When you average all this up, and assume there will be at least some price inflation for inputs such seed, fuel, lubricants and new equipment (when was the last time this year’s new tractor was cheaper than last year’s new tractor?), you can assume $5/bu. breakevens are the new normal.
 
Yes, corn prices could fall below this level in the short-term. In fact, if 94 million acres get planted to corn in 2012 and we get good weather across the now expanded corn belt (from North Dakota east to the barrier islands of the Atlantic), the stocks-to-use (STU) ratio could exceed 10%. The current STU is 6.7%. That huge surplus could drive prices below $4, say some analysts.
 
But it won’t stay there. It can’t. Not if it costs $5/bu. to grow the stuff. Over the long term, commodity markets like corn and soybeans and milk reach equilibrium with their costs of production. That’s the way commodity economics work. Always have. Always will.  
 
The bad news is that dairy producers will have to live with this new normal. They will either have to pay $5/bu. for corn or they’ll have to compete with their corn growing neighbors for land that supports $5/bu. corn. It’s pretty much that simple.
 
For more from the Top Producer Seminar, click here.
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