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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

How Does Delayed Plantings Affect Your Profit Margins?

Apr 25, 2013

My friend Chris Barron (Ask the Margins Expert) and I were discussing how delayed planting of corn this spring may affect farmer's net profit margins.  A reduction in yield and/or price can have a dramatic affect on overall profit margins since most of a farmer's costs are what we call fixed.  Cash rent, the seed that is in ground, the fertilizer that has been applied, etc. although normally viewed as a variable cost, once you plant the crop, these costs are now "fixed".

During very good years such as 2011 and most likely 2012 assuming adequate crop insurance, farmers obtain the benefits of these fixed costs.  Unlike variable costs that increase with revenues, these costs remain fairly constant, with each resulting dollar increase in revenues due to higher prices or yields drops mostly to the bottom line.

However, this year may be a completely different situation.  We are facing much lower prices this year than last, although if you locked in spring prices with 85% crop insurance levels, you most likely guaranteed yourself a minimum of $5 per bushel for corn and about $10.50 for beans.  However, the last few years with high prices have also resulted in what I call inverse basis for many farmers.  Unlike normal years when the farmer may receive 50 cents less than futures prices, the last couple of years many farmers have received higher than futures price.  This year if the carryover ends up closer to 2 million bushels than the current carryover, we will probably see basis levels return to more normal levels.  In that case, your guaranteed corn price of $5 may be closer to $4.5 or lower.

As the planting date gets delayed beyond May 15, yield loss may be in excess of 1% per DAY.  On 200 bushel corn, this is 2 bushels a day per acre or at least $10 per acre per day.  A week costs you $70 and two weeks might cost your $140 per acre.

Let's assume a corn farmer with 180 bushel yields projects revenues of $1,000 and costs of $800 for 2013.  This assumes that the farmer will receive a net $5.50 per bushel.  Instead of planting at the end of April, he does not get his corn into the ground until May 25.  This results in a 12% reduction in yields to 158 bushels and instead of getting an $5,50 average for his corn, basis goes against him and he ends up netting $4.75.  This results in total revenues of $750 with an average loss of $50 per acre.  Whereas in 2012, this same farmer may have ended up netting close to $300 or more per acre, this year, he may face a loss of $50 or more.

Have you run an analysis on your operation to see how a delayed planting may affect your margins. 

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COMMENTS (1 Comments)

Freeport, IL - Freeport, IL
Your point is well taken. This comment is intended to provide a more general understanding of the "workings" of federal crop insurance. Federal Crop Revenue Insurance protects revenue not price. In your example, 180 bu./a. yield expected yield would have an adjusted actual production history (APH) close to 180 bu./a.. The spring price this year for most states is $5.65/bu. An 85% coverage election would provide a spring guarantee of $865 per acre (180 bu./a. APH X 85% Coverage election X $5.65 Spring price). A fall insurance price (October average of CME’s Dec corn contract) of $5.25/bu. and an actual yield of 158 would provide insurance revenue of $830 per acre (158 X $5.25)). In this case an indemnity would be due the grower of $35 per acre ($865 spring guarantee - $830 actual fall insurance revenue). If farm yield goes to 200 bushel an acre – I know this is not the point of your post but if it did – the fall insurance price would have to go below $4.35 per bushel before an indemnity would be due ($865 Spring guarantee / 200 actual fall yield = $4.32 fall trigger price). In this case the revenue insurance does not protect prices below $5.00. Any yield below 153 bushel per acre (APH X Coverage election in this case 180 X 85% =153) would trigger an indemnity to help offset expenses. The real issue with crop insurance, that follows your theme, is the dilution of revenue protection that occurs when a crop is planted during the late plant period. This is more an issue today with more growers choosing enterprise units (over the smaller more expensive basic or optional units) and the chance of late planting. Maybe someone more eloquent with a pen may wish to take on that subject.​
1:44 PM Apr 26th
 

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