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It’s All About Profits

November 17, 2010
 
 

TP Web Extra IconPrices for production and inputs have fluctuated wildly in the past few years. To make matters worse, grain buyers fearing margin calls tend to not offer forward contracts very far out and fertilizer suppliers are reluctant to order product, increasing the third-party risk that farmers face. Facing so much uncertainty, it is imperative to lock in profits to whatever extent possible, yet without leaving more money on the table than you must.

Prospects are promising for 2011. “Many believe the total cost of production for a 160-bu. corn crop is about $4 per bushel. If December futures are $5.50, the market is offering producers close to a $250 profit objective,” says Bob Utterback of Utterback Marketing. If soybeans are $11.50 and production costs are $8, you might be able to lock up $175 per acre if you can average over 50 bu. per acre (minus basis in both cases). “The problem is it’s a long time to next summer and if there’s one thing I’ve learned, it is that surprises seem to happen when you are least prepared,” Utterback says.

A big danger is that input costs will explode given the crop price increases, he says. “I cannot emphasize enough the need to lock in as much as possible of your 2011 and perhaps 2012 input costs.”

In fact, Utterback says, this may be the year to skew production toward corn, then “flip back to more soybeans in 2012. You would be producing corn with cheaper inputs. Then, when costs are moving higher into 2012, you would be growing less-input-intensive soybeans.”

Utterback suggests using put options in marketing to protect the downside yet maintain flexibility and avoid potentially large margin calls.

University of Illinois ag economist Darrel Good agrees: “Prospects for large ranges in annual price movements suggest that producers may find more value in the use of options to protect profitable price levels but also to capture higher prices should they occur.”

At the same time, expectations for large ranges in prices may continue to limit the forward pricing opportunities offered by grain merchandisers, he cautions. “These may take the form of shorter time horizons for forward contracting and/or weak basis levels for forward contract bids. Some may offer contracts but require producers to participate in the margining of the underlying futures and options positions. Whether that is the case or producers use futures or options directly, it does, of course, have cash-flow and credit implications.”

Market Planning. Planning sales of grain production is an ongoing process, not a one-time event, says Carl German, University of Delaware Extension grain marketing specialist.

Figuring your cost of production is the first step in setting your profit goals and price objectives, he says. “Many producers set a maximum sales price objective that includes fixed costs and profit, and a minimum price that will cover the cash costs of production and allow one to stay in business for the coming year.”

Gary Schnitkey, agricultural economist at the University of Illinois, expects a continued soft U.S. economy to lead to fuel and fertilizer prices near summer 2010 levels and modest increases in seed prices. In 2010, corn–soybean fertilizer cost averaged $105 versus $185 in 2009. Rather than including land as a cost, Schnitkey includes direct costs, power costs and overhead. (Direct government payments have been left out in the table on the facing page; you may want to add them in.) The resulting net profit is available to be split between return to management and land. “My analysis implies that cash rent, on average, should not increase from 2010 levels,” Schnitkey says.

Once you arrive at your total costs, divide by expected yield to find the pricing targets that German considers the starting point for a marketing plan. Adjust your target prices over the two-year marketing window as needed.

Click here to download Peliminary 2011 Crop Budgets worksheet

 

Top Producer, Mid-November 2010

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FEATURED IN: Top Producer - Top Producer Mid-November 2010

 
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