The Bottom Line: Opportunity Knocks

October 19, 2012 02:17 AM

What started out as a promising crop season changed for the worse in June. As producers, we’re subject to ever-changing weather patterns. To put it in perspective: Just a year ago, the Missouri and Mississippi rivers were flooding and thousands of acres were destroyed because of too much water. Fast-forward 12 months, and thousands of acres are destroyed because of too little water.
Now we have $8 corn and $17 soybeans. If we had received an inch of rain a week during July throughout the Corn Belt, corn would be $4.

Managing your bottom line is a challenge, but with every adversity comes opportunity. Let’s look at the positives: Most producers have crop insurance with revenue protection and the fall harvest price option. Since July, when the weather outlook turned worrisome, we have been running the numbers on anticipated yields and estimated crop insurance proceeds. Most growers will still have a great year, with anticipated return on equity in the double digits.

For livestock producers, it is a whole different story. High feed cost, limited pasture and hay and the need to chop silage for feed compound the challenges. I still am bullish for the animal protein business, particularly beef, hog and dairy operations, and there are bright spots on the horizon. Even with corn and meal prices at these levels, there is profit to be locked in for the summer 2013 months for hog producers, with lean hogs more than $100.

For cash grain farmers, now is the time to bulletproof your balance sheet because things will change. Corn at $8 will put a damper on demand and encourage production worldwide.

History is on our side in predicting what will happen. Based on the data points in the chart below, I found the average profit margin during the past 40 years was 9¢ per bushel for corn. Chances are the $2 and $4 per bushel profit in corn production today is not sustainable for the long run. Historically, the average price of the commodity levels off at or near the average cost of production. For those curious, the profit margin for soybeans was 30¢ per bushel.

p40 Opportunity Knocks chart

As a rule of thumb, your working capital should be equal to or greater than half your annual expenses (including debt payments and living costs or owner draws).

Maximize productivity. Bulletproofing your income statement becomes more difficult with increasing price volatility and costs. This year, land rental rates jumped from as little as $15 to as much as $130 per acre. Seed, fertilizer and fuel costs continue to increase, as well.

However, there are still excellent opportunities for solid profits for next year—December 2013 corn is above $6.50 CBOT price. If you continually lock in profits, you always add to your bottom line.



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